ST Engineering FY2016 AGM - Notes
There were exhibits with scale models of some projects (such as luxury aircraft, converted freighter aircraft, Terrex) outside the convention hall with staff available to explain more about these projects.
ST Engineering (STE) started out as a defence company. Now defence makes up 35% of its business.
There are four sectors of specialisation in STE:
1. Aerospace
2. Electronics
3. Land Systems
4. Marine
Being under one umbrella, the 4 sectors are able to share services (eg HR department) and procure at better prices due to the larger size and scale. (A shareholder queried if it would be better to split up the sectors)
Business Performance and Highlights:
Performance of Land Systems sector was affected by the liquidation of JHK, a joint venture in China. STE bit the bullet to liquidate JHK and took a $61 million impairment charge as the management realised it was not sustainable in the long term. Setting up distribution channels in China needed more money and the JV was low on funds.
Revenue and PBT would be up if China Special Vehicles unit was excluded (the liquidation of JHK and divestment of GJK). CEO nonetheless acknowledges that revenue and earnings has been flat the past few years. He attributes this to macroeconomic and structural issues. A structural issue cited was in MRO, where OEMs are encroaching into the after market business.
Increased holdings in EFW, a joint venture with Airbus to 55%. EFW does aircraft passenger to freighter conversion, composite floorboards and is looking into MRO. CEO says it is a "nascent business with learning curve" and is currently in the investment phase.
EFW has secured customers for freighter conversion: DHL and Eygpt Air. However not yet into serial production. EFW is a long term investment with 20-25 years horizon.
Terrex 2 has been shortlisted by US Marines, together with another defence contractor. Beat Lockheed Martin to the shortlist "on their own turf." The model of Terrex impounded in Hong Kong earlier this year is Terrex 1. This incident has not affected STE's bid to the US Marines.
Dividends:
10.8% pa. returns if one invested at IPO and reinvested all the dividends.
A shareholder asks if the payout ratio will go back to 100% (currently 85%). Chairman explains that overseas investments have dividend withholding tax.
Chairman highlighted three methods of increasing returns to shareholders:
1. Dividends, which have been maintained at 15 cents past few years. This year all the dividends have been recorded as ordinary dividends, underscoring the board's confidence in the future.
2. Invest more to increase company's value.
3. Buyback of shares.
Dominant Market Share:
- 30% market share in 40mm munitions
- 30% market share in VSAT modem
- 60% market share in VSAT hub station
- #1 in aircraft body MRO
- Supplies all the composite floorboards to Airbus commercial aircraft (via EFW)
Growth Levers:
Areas identified for future growth: Defence, smart city technology, robotics, cyber security.
Expansion into geospatial services after the launch of Singapore's first commercial earth observation satellite.
Cyber security will be key and will span across sectors with the proliferation of Internet of Things (IoT).
STE will focus on autonomous self driving bus instead of car: Bus is more likely to be deployed in the near term, due to lesser complexity (with bus lanes in Singapore) and a more controlled environment.
China is the fastest growing aviation market. MRO industry spending is expected to increase at 4% a year. STE has MRO operations in Guangzhou and Shanghai airport to tap on the growing China market.
Capital Allocation:
Will invest in areas with high growth potential, will divest or "lay down" businesses not giving the expected return.
Management looks more at return on capital employed than profit margin.
There is no hurdle rate for returns. The focus will be long term sustainability. The baseline would be at least better than the cost of capital. (A shareholder queried about profit margins)
Leveraging on Partnerships:
In Singapore, working with various government bodies to use Singapore as a testbed for new technologies before exporting overseas. Eg. Rail electronics systems
In Guangzhou, China, partner with airport authority for MRO with land available for future expansion.
Longstanding relationship with airlines lets STE secure MRO contracts; doing so now would be difficult as most airlines seek to do it in-house.
Partnered with Dettol in China for online/offline distribution of Air+ mask. Leveraged on Dettol's established distribution channels and expertise as STE is not a consumer company.
Taps on overseas partners with local knowledge, supply chains and distribution channels.
Disruption:
STE is also a disruptor, and is looking beyond the current 4 sectors to possibly add a new sector. Will be on the offensive to avoid being disrupted.
An example is the Air+ mask and infra red temperature scanner. There was no such product in the market at that time.
On Citycab taxi: It is synergistic with MRO services, will continue to monitor the disruption caused by Grab and Uber.
Environmental Engineering:
Recent projects include a NEWater plant in Kranji. Will benefit from Olivia Lum's presence on the board. A shareholder asked if there was a conflict of interest. The answer is no, as Hyflux focuses on desalination.
Medical Technology:
Will assess their opportunities as it is a very broad field.
Vested at $3.06
ST Engineering (STE) started out as a defence company. Now defence makes up 35% of its business.
There are four sectors of specialisation in STE:
1. Aerospace
2. Electronics
3. Land Systems
4. Marine
Being under one umbrella, the 4 sectors are able to share services (eg HR department) and procure at better prices due to the larger size and scale. (A shareholder queried if it would be better to split up the sectors)
Business Performance and Highlights:
Performance of Land Systems sector was affected by the liquidation of JHK, a joint venture in China. STE bit the bullet to liquidate JHK and took a $61 million impairment charge as the management realised it was not sustainable in the long term. Setting up distribution channels in China needed more money and the JV was low on funds.
Revenue and PBT would be up if China Special Vehicles unit was excluded (the liquidation of JHK and divestment of GJK). CEO nonetheless acknowledges that revenue and earnings has been flat the past few years. He attributes this to macroeconomic and structural issues. A structural issue cited was in MRO, where OEMs are encroaching into the after market business.
Increased holdings in EFW, a joint venture with Airbus to 55%. EFW does aircraft passenger to freighter conversion, composite floorboards and is looking into MRO. CEO says it is a "nascent business with learning curve" and is currently in the investment phase.
EFW has secured customers for freighter conversion: DHL and Eygpt Air. However not yet into serial production. EFW is a long term investment with 20-25 years horizon.
Terrex 2 has been shortlisted by US Marines, together with another defence contractor. Beat Lockheed Martin to the shortlist "on their own turf." The model of Terrex impounded in Hong Kong earlier this year is Terrex 1. This incident has not affected STE's bid to the US Marines.
Dividends:
10.8% pa. returns if one invested at IPO and reinvested all the dividends.
A shareholder asks if the payout ratio will go back to 100% (currently 85%). Chairman explains that overseas investments have dividend withholding tax.
Chairman highlighted three methods of increasing returns to shareholders:
1. Dividends, which have been maintained at 15 cents past few years. This year all the dividends have been recorded as ordinary dividends, underscoring the board's confidence in the future.
2. Invest more to increase company's value.
3. Buyback of shares.
Dominant Market Share:
- 30% market share in 40mm munitions
- 30% market share in VSAT modem
- 60% market share in VSAT hub station
- #1 in aircraft body MRO
- Supplies all the composite floorboards to Airbus commercial aircraft (via EFW)
Growth Levers:
Areas identified for future growth: Defence, smart city technology, robotics, cyber security.
Expansion into geospatial services after the launch of Singapore's first commercial earth observation satellite.
Cyber security will be key and will span across sectors with the proliferation of Internet of Things (IoT).
STE will focus on autonomous self driving bus instead of car: Bus is more likely to be deployed in the near term, due to lesser complexity (with bus lanes in Singapore) and a more controlled environment.
China is the fastest growing aviation market. MRO industry spending is expected to increase at 4% a year. STE has MRO operations in Guangzhou and Shanghai airport to tap on the growing China market.
Capital Allocation:
Will invest in areas with high growth potential, will divest or "lay down" businesses not giving the expected return.
Management looks more at return on capital employed than profit margin.
There is no hurdle rate for returns. The focus will be long term sustainability. The baseline would be at least better than the cost of capital. (A shareholder queried about profit margins)
Leveraging on Partnerships:
In Singapore, working with various government bodies to use Singapore as a testbed for new technologies before exporting overseas. Eg. Rail electronics systems
In Guangzhou, China, partner with airport authority for MRO with land available for future expansion.
Longstanding relationship with airlines lets STE secure MRO contracts; doing so now would be difficult as most airlines seek to do it in-house.
Partnered with Dettol in China for online/offline distribution of Air+ mask. Leveraged on Dettol's established distribution channels and expertise as STE is not a consumer company.
Taps on overseas partners with local knowledge, supply chains and distribution channels.
Disruption:
STE is also a disruptor, and is looking beyond the current 4 sectors to possibly add a new sector. Will be on the offensive to avoid being disrupted.
An example is the Air+ mask and infra red temperature scanner. There was no such product in the market at that time.
On Citycab taxi: It is synergistic with MRO services, will continue to monitor the disruption caused by Grab and Uber.
Environmental Engineering:
Recent projects include a NEWater plant in Kranji. Will benefit from Olivia Lum's presence on the board. A shareholder asked if there was a conflict of interest. The answer is no, as Hyflux focuses on desalination.
Medical Technology:
Will assess their opportunities as it is a very broad field.
Vested at $3.06
Comments
Post a Comment