Thursday, 13 July 2017

Is ST Engineering Overly Reliant on Government Contracts?


I was having coffee with an ex-colleague the other day, when the topic turned to Singapore Technologies Engineering Ltd (SGX: S63) (“STE”).  My ex-colleague remarked that STE still relies mainly on government awarded contracts to survive.  I was intrigued by his words and I decided to do a little sleuthing through STE’s filings to validate his observation.  I found some interesting information, but before I get to that, a little history lesson is in order.

Origin of Singapore Technologies Engineering

The birth of STE traces back fifty years ago when pioneer companies were founded out of necessity to support Singapore’s national defence. [1]

  • In 1968, the Singapore Shipbuilding and Engineering (precursor of ST Marine) was formed to build and repair naval vessels.  
  • In 1969, the Singapore Electronic & Engineering (precursor of ST Electronics) was formed to provide electronic and electrical services for the Singapore Armed Forces.  
  • In 1971, the Singapore Automotive Engineering (precursor of ST Kinetics) was formed to provide military vehicle maintenance.  
  • In 1975, the Singapore Aerospace Maintenance Co. (precursor of ST Aerospace) was formed to provide military aircraft maintenance.  
  • Fast forward to 1997, the four companies were merged to form ST Engineering, as it is known today.

Revenue Breakdown between Commercial and Defence

STE first diversified into the commercial sector in 1990 with the set-up of airframe maintenance, repair and operations (MRO) facilities in Singapore and Alabama, U.S. [1]  Since then, STE has expanded their commercial offerings which include freighter conversions and satellite communications.  The question on my mind was the extent of contribution made by the commercial segment to STE’s current revenue.

When I pored through STE’s financial statements, I could not find the answer.  While STE provides segmental revenue data based on location of customers, the company does not reveal in detail the revenue earned on commercial projects versus defence projects.

Ironically, I chanced upon the answer in an unlikely place – the Letter to Shareholders in STE’s Annual Reports.  Within the letter, STE’s management provided an approximate revenue breakdown between their commercial and defence segments.  For FY2016, STE earned 35% of their revenue through defence projects and a significant 65% of their revenue through commercial projects. [2]  (My ex-colleague would have been surprised.)

Figure 1. STE's revenue breakdown by customer type.  Source: STE AR 2016.

I extracted the same information from past fiscal years’ Annual Reports.  Sadly, there was no similar information available prior to FY2012.  I worked out the revenue contribution from each segment and compiled a stack chart for clarity.  Refer to Figure 2 below.

Figure 2.  STE's revenue breakdown from FY2011 to FY2016,

STE’s commercial revenue has been increasing incrementally on an annual basis.  Unfortunately, the growth in defence revenue has not matched in tandem, resulting in STE’s total revenue stagnating over the past few years.  With the pending two per cent cut in MINDEF’s budget, STE’s defence revenue is likely to be impacted further. [3]

Future Growth Areas

So which industries does STE see potential in?  A sliver of this information was provided in the same section.  In their FY2016 Letter to Shareholders, STE’s management wrote, “We will continue to invest in them (STE’s core businesses) and at the same time, devote additional resources to other new high growth areas such as robotics and cyber security (emphasis mine).” [2]

During the closing of STE’s Q1 2017 Earnings Call, Chief Executive Officer Vincent Chong reiterated STE’s investment in the “fibre optic back-haul infrastructure to support Smart City, Smart Nation, ICT solution”. [4]  (Chong was referring to STE’s recent 51% acquisition of SP Telecommunications, a network infrastructure provider in Singapore.) [5]

The CEO also emphasized STE’s investment in autonomous vehicles.  Earlier in the call, Chong elaborated that STE had chosen to focus on the development of autonomous buses – not autonomous cars – to address the “unique challenges which Singapore faces in land and labour constraints”.  [4]  In April 2017, STE had announced their plans to roll out such autonomous buses for trial on Singapore roads by 2020.  The company also revealed their intention to roll out Mobility-on-Demand-Vehicles (MODV) for trial in Sentosa by 2019.  [6]


STE has come a long way from being a Singapore Armed Forces contractor to developing a multi-prong approach of growing their business.  The bulk of STE’s revenue now comes from the commercial sector, contrary to the impression some folks may have.  The company intends to venture into new niche areas such as autonomous vehicles and cyber security, while continuing to invest in their core expertise.

The Eleutherian Odyssey

Quick Facts


1. ST Engineering Ltd, “Our Story and Key Milestones”

2. ST Engineering Ltd, “Letter to Shareholders”, FY2016 Annual Report, Page 7.

3. Channel NewsAsia, “Budget 2017: Singapore cuts ministries’ spending to stay ‘prudent, effective’”, 20 Feb 2017.

4. Seeking Alpha, “ST Engineering's (SGGKF) CEO Vincent Chong on Q1 2017 Results - Earnings Call Transcript”, 12 May 2017.

5. ST Engineering Ltd, “ST Engineering’s Electronics Arm Acquires 51% equity stake in SP Telecommunications Pte Ltd”, 18 Jan 2017, Singapore Exchange filing.

6. Singapore Business Review, “ST Engineering to deploy autonomous buses, driverless shuttles”, 10 Apr 2017.

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