ST Engineering faces short-term headwinds as it grapples with chip shortages
Yong Hui Ting &
Janice Lim
DEFENCE and engineering group ST Engineering on Friday (Aug 12) cautioned of global headwinds putting pressure on its 2022 earnings, as it reported a 5.4 per cent drop in net profit for the first half ended Jun 30.
“In terms of the global headwinds, I think it’s not getting better. As we know, it’s evolving,” said the group’s chief executive officer Vincent Chong in a media conference on the same day.
ST Engineering’s net profit declined to S$280 million from S$296.1 million last year, due to higher transaction and integration expenses for its Transcore acquisition and the tax-exempt effect of the Job Support Scheme, which were given out by the government as wage subsidies to help companies tide over the Covid-19 pandemic.
Bloomberg reported that analysts estimated full-year net income for 2022 to come in at S$575 million.
The company said at the release of its H1 2022 earnings that net profit would have been 4 per cent higher year on year at S$307 million without these effects.
Earnings per share also slipped 5 per cent to S$0.0899 from S$0.095.
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The group has had to come up with cost saving measures, supply chain reconfiguration, price adjustments and product redesign to address challenges from supply chain disruptions, chip shortages and higher energy costs.
“Despite all that, we’re able to undertake steps to mitigate the impact from being fully felt. But we certainly are facing those headwinds, and we are taking many steps to mitigate them, and they are all manifested in our first half results, which remain resilient against those near term pressures,” said Chong.
Revenue for the group, however, grew 17 per cent to S$4.3 billion from S$3.7 billion, driven by higher contributions from all business segments. The bulk of revenue was contributed by its commercial sales and defence sales arms, which accounted for S$2.8 billion and S$1.5 billion respectively.
The earnings before interests and taxes for the group rose 8 per cent to S$384.6 million, up from S$355.1 million a year ago.
Earnings for the commercial aerospace segment soared 78 per cent to S$182.7 million, on the back of an increase in aircraft maintenance, repair and operation (MRO) services provided, more nacelle deliveries and a one-off pension restructuring effect. However, earnings for the urban solutions and satellite communications segment were hit hard as it registered a loss of S$12.1 million compared to positive earnings of S$11.2 million the year before.
Tan Lee Chew, president of commercial business at ST Engineering, said that its satellite communications business is still impacted by the lingering effects of the Covid-19 pandemic, especially in the aviation and maritime segments. A chip shortage, which is a result of disruptions in supply chain, has also impacted its Internet of Things solutions business.
She also noted that it is coming off a high base in the first half of 2021, which is unusual as satellite communications tend to see stronger demand in the second half of the year.
“Whilst we have been mitigating this risk with supply chain diversification and product redesign, all these would take time. We’ve also announced price increases, which is the reason why we are saying that the second half is probably going to give us more grounds to mitigate the challenges and headwinds that we are seeing,” said Tan.
On the costs associated with ST Engineering’s Transcore acquisition, Chong said he expects transaction expenses and integration costs to continue for a few more years. Integration costs should come up to between S$10 million and S$20 million each year, while transaction costs would be about 1 per cent of transaction value.
With more than S$170 million worth of electronic tolling projects and radio-frequency identification sales won by Transcore in the second quarter, Chong said that Transcore, excluding its transaction costs, is profitable at the company level. (see amendment note)
“However, at the group level, if we consider amortisation of intangibles and acquisition interests, we’re not yet profitable. As we said, we will be accretive in year 2,” he added. The group had previously said that cashflow for Transcore would be positive in the first year after acquisition.
Chong was optimistic that the TransCore acquisition, completed in March this year, will accelerate business growth in its smart city segment. With about US$1 billion raised out of a US$2.7 billion deal, ST Engineering’s chief financial officer Cedric Foo said that it will look to raise another US$700 million in short-term bonds to fund the Transcore deal.
While business has picked up for the group’s commercial aerospace segment with the reopening of borders, Jeffrey Lam, president of commercial aerospace at the group, said that it has not fully recovered to pre-Covid levels. Among its MRO business segment, the hangar usage is almost at capacity, but the engine and components sub-segment is still recovering.
As for its deliveries as an original equipment manufacturer for engine nacelle and composite panels, Lam said that is getting closer to pre-Covid levels.
As at Jun 30, the group’s order book stood at S$22.2 billion. It expects to deliver approximately S$4.6 billion from the order book in the remaining months this year.
Board approved a second interim dividend of S$0.04 for the quarter ended Jun 30, to be paid out on Sep 2 after book closure on Aug 23.
Shares of ST Engineering fell 0.3 per cent or S$0.01 to S$4.06 at Friday’s closing bell.
Amendment note: This story had previously stated that the amount of sales won by Transcore is US$170 million, but it is actually S$170 million. It also quoted ST Engineering CEO Vincent Chong saying that Transcore would be acquisitive in the second year after its acquisition. He meant that Transcore would be accretive. The article also stated that the interim dividend was management approved. It is actually board approved.
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