There are not many blue-chip companies with wide exposure to different sectors.
This diversification helps the company to better buffer against recessions where some divisions can help support others.
Keppel Corporation Limited (SGX: BN4) is one of them, and the group’s share price has done well this year, rising by close to 44% year to date.
Another is Singapore Technologies Engineering Ltd (SGX: S63), or STE.
STE has a diverse portfolio of divisions covering the aerospace, smart cities, defence and public security sectors.
The conglomerate has operations spanning the globe and serves customers in more than 100 countries.
STE’s share price, however, stands in stark contrast to Keppel Corporation, having fallen by nearly 10% year to date.
This is despite the engineering giant reporting a record-high order book as of 30 September 2022.
Can investors look to 2023 for STE’s share price to jump back above S$4? Let’s dig deeper to find out.
A slow and steady transformation
It’s been an interesting journey for STE these past two years.
The group first announced a major reorganisation back in December 2020 to organise its business into two core divisions to replace the old four-division system.
STE followed up last year with an Investor Day that charted its five-year growth plan to boost its commercial aerospace arm and grow in the smart city segment.
It also set ambitious targets for 2026 with CEO Vincent Chong commenting that STE had divested 12 business units within the last three years to become leaner and more resilient.
This transformation has helped the group to realign its internal divisions to make capital allocation more efficient.
The setting of five-year objectives also helps to sharpen management’s focus on STE’s key pillars of growth.
An improved set of financials
These moves are starting to show financial results.
The group posted an admirable performance for its fiscal 2022’s first half (1H2022).
Revenue grew 17% year on year to S$4.3 billion with growth coming from all its segments.
Investors may have been disappointed by the 5% year on year fall in net profit to S$280 million despite the revenue growth.
The headline number, however, includes S$125 million of government support.
Stripping out this item and adjusting for other exceptional items, STE’s operating profit would have climbed 45% year on year to S$333 million.
Next, the group has released a robust set of numbers for its third quarter of 2022 (3Q2022).
For 9M2022, revenue climbed 19% year on year to S$6.5 billion, boosted by growth across all of its divisions.
What’s more, income-focused investors can also rejoice as STE is now paying out a quarterly dividend of S$0.04, bringing the full-year dividend to S$0.16.
This level of dividends is a slight improvement over the S$0.15 per share that the group has paid out over the past five years.
Growing its order book to a new high
STE has also demonstrated a knack for snagging contracts, with healthy contract wins reported throughout 2022.
The first quarter of 2022 (1Q2022) saw the group secure S$2.4 billion of new contracts.
In the following quarter, STE snagged another S$3.1 billion followed by S$4.8 billion in 3Q’22.
Elsewhere, the engineering group announced the divestment of its loss-making US Marine business last month.
With the disposal, a total of S$1.9 billion in order book will also be removed.
It’s important to remember, though, that the quality of the order book is just as important as the quantity.
By ridding itself of the loss-making US Marine division, STE can now chart more profitable growth with its remaining order book.
Despite the removal of the S$1.9 billion of orders, STE still reported a record-high order book of S$23.1 billion, 71% higher than its pre-COVID level of S$13.5 billion.
To top it off, the group also reported that the total value of contracts secured for 4Q2022, including a S$1.5 billion toll systems contract for New Jersey, has already exceeded the S$1.9 billion marine orders divested.
Get Smart: Patience will be rewarded
It looks like STE is headed in the right direction.
The divestment of its US Marine business, along with its record order book, should see the engineering and technology group report better numbers in 2023.
Investors will need the patience to see the fruits of these efforts, but in time to come, their patience should be rewarded as the share price climbs in tandem with business growth.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
