SINGAPORE Technologies Engineering (ST Engineering : S63 0%) strives to cut down on capital employed to help it lower its borrowing of S$6.8 billion, including a plan to reduce several hundreds of million of dollars in capital employed in the coming months.

 

Chief financial officer Cedric Foo stated in a briefing on Monday (Nov 28) after the engineering heavyweight released its third-quarter market update: &ldquo And if you reduce your capital employed to run this particular size of business, you can also use it to reduce borrowing and therefore the impact on floating interest rates.&rdquo

 

ST Engineering posted a 19 per cent rise in revenue to S$6.5 billion for the nine months ended Sep 30, compared with S$5.5 billion in the corresponding period a year earlier. It also declared an interim dividend of S$0.04 a share for the third quarter. The expected payment date is Dec 20, with books closure on Dec 7, the defence and engineering group said.

 

The mainboard-listed firm has debts of S$6.8 billion as at end September, 54 per cent of which were on fixed rate and the remaining 46 per cent on floating rate. This is a &ldquo very balanced&rdquo approach to achieve an effective interest rate hedge and also to avoid undue speculation on interest rates movements., Foo said.

 

He said: &ldquo Our core business is engineering and technology, and we should focus on that and try to be balanced about interest rates.&rdquo

 

For every 25 basis-point increase in interest rate, on a sustained basis for a year, ST Engineering will need to pay S$7-8 million more in interest expense a year. But the firm&rsquo s cost of debt in the first nine months of this year was in the low 2 per cent as interest rates only started to rise in recent months.

 

ST Engineering is working on cutting down its capital employed through these three measures: optimising net working capital, divesting non-core businesses and securitising aviation leasing assets.

 

The firm has taken a &ldquo very active&rdquo approach to portfolio rationalisation as it reviews businesses that are non-strategic, non-core, cannot scale or have non-attractive markets, having divested or exited 15 businesses in recent years.

 

Securitising aviation leasing assets will allow ST Engineering to be asset light, with the securitisation proceeds to be used to pay down borrowings on floating rates.

 

&ldquo Through all these measures, we&rsquo ve targeted to reduce capital employed by a few hundred million dollars in the next several months,&rdquo Foo said.

 

ST Engineering reported higher revenue contributions across all business segments in the market update.

 

Its urban solutions and satcom segment saw the highest gain at 54 per cent, raking in S$1.2 billion compared with S$787 million the year before. This was mainly due to contributions from the group&rsquo s TransCore acquisition and higher revenue recognition from its Smart City project. The group won new contracts worth S$2 billion in the third quarter for this segment, totalling S$2.7 billion for the nine-month period.

 

Its defence and public security segment continued to be the highest revenue contributor with S$3.1 billion recorded, up 6 per cent from the S$3 billion posted previously. There was S$1.8 billion in new contract wins, notably in the Middle East, bringing the nine-month total to S$4.5 billion.

 

The commercial aerospace segment brought in S$2.2 billion in revenue, up 25 per cent from the S$1.7 billion recorded in the year-ago period, as the aviation sector recovers. The segment had new contract wins of S$1 billion in the third quarter, totalling S$3 billion for the nine-month period.

 

The group&rsquo s total order book stood at S$25 billion as at Sep 30, with S$2.5 billion to be delivered in the fourth quarter of 2022. ST Engineering expects its fourth quarter new contracts to more than offset the S$1.9 billion US marine order book divested.

 

SINGAPORE Technologies Engineering (ST Engineering : S63 0%) strives to cut down on capital employed to help it lower its borrowing of S$6.8 billion, including a plan to reduce several hundreds of million of dollars in capital employed in the coming months.

 

Chief financial officer Cedric Foo stated in a briefing on Monday (Nov 28) after the engineering heavyweight released its third-quarter market update: &ldquo And if you reduce your capital employed to run this particular size of business, you can also use it to reduce borrowing and therefore the impact on floating interest rates.&rdquo

 

ST Engineering posted a 19 per cent rise in revenue to S$6.5 billion for the nine months ended Sep 30, compared with S$5.5 billion in the corresponding period a year earlier. It also declared an interim dividend of S$0.04 a share for the third quarter. The expected payment date is Dec 20, with books closure on Dec 7, the defence and engineering group said.

 

The mainboard-listed firm has debts of S$6.8 billion as at end September, 54 per cent of which were on fixed rate and the remaining 46 per cent on floating rate. This is a &ldquo very balanced&rdquo approach to achieve an effective interest rate hedge and also to avoid undue speculation on interest rates movements., Foo said.

 

He said: &ldquo Our core business is engineering and technology, and we should focus on that and try to be balanced about interest rates.&rdquo

 

For every 25 basis-point increase in interest rate, on a sustained basis for a year, ST Engineering will need to pay S$7-8 million more in interest expense a year. But the firm&rsquo s cost of debt in the first nine months of this year was in the low 2 per cent as interest rates only started to rise in recent months.

 

ST Engineering is working on cutting down its capital employed through these three measures: optimising net working capital, divesting non-core businesses and securitising aviation leasing assets.

 

The firm has taken a &ldquo very active&rdquo approach to portfolio rationalisation as it reviews businesses that are non-strategic, non-core, cannot scale or have non-attractive markets, having divested or exited 15 businesses in recent years.

 

Securitising aviation leasing assets will allow ST Engineering to be asset light, with the securitisation proceeds to be used to pay down borrowings on floating rates.

 

&ldquo Through all these measures, we&rsquo ve targeted to reduce capital employed by a few hundred million dollars in the next several months,&rdquo Foo said.

 

ST Engineering reported higher revenue contributions across all business segments in the market update.

 

Its urban solutions and satcom segment saw the highest gain at 54 per cent, raking in S$1.2 billion compared with S$787 million the year before. This was mainly due to contributions from the group&rsquo s TransCore acquisition and higher revenue recognition from its Smart City project. The group won new contracts worth S$2 billion in the third quarter for this segment, totalling S$2.7 billion for the nine-month period.

 

Its defence and public security segment continued to be the highest revenue contributor with S$3.1 billion recorded, up 6 per cent from the S$3 billion posted previously. There was S$1.8 billion in new contract wins, notably in the Middle East, bringing the nine-month total to S$4.5 billion.

 

The commercial aerospace segment brought in S$2.2 billion in revenue, up 25 per cent from the S$1.7 billion recorded in the year-ago period, as the aviation sector recovers. The segment had new contract wins of S$1 billion in the third quarter, totalling S$3 billion for the nine-month period.

 

The group&rsquo s total order book stood at S$25 billion as at Sep 30, with S$2.5 billion to be delivered in the fourth quarter of 2022. ST Engineering expects its fourth quarter new contracts to more than offset the S$1.9 billion US marine order book divested.

 

In the wake of a US$1.07 billion ($1.47 billion) contract win from Singapore Technologies Engineering&rsquo s (ST Engineering) subsidiary, Transcore, analysts from RHB Group Research and CGS-CIMB Research have maintained their &ldquo add&rdquo and &ldquo buy&rdquo calls on ST Engineering, with unchanged target prices of $4.15 and $3.99 respectively.

 

The contract win is for a turnkey tolling system contract for two projects in the state of New Jersey, USA.

 

One project, worth US$914 million is with the New Jersey Turnpike Authority (NJTA). The project includes the design, installation, operation, and maintenance for 10 years of tolling systems on the 241-kilometer Garden State Parkway and 209-kilometer New Jersey Turnpike, two of the busiest toll roads in the US.

 

The other contract is a $218.2 million contract with the South Jersey Transportation Authority (SJTA). The project covers the design, installation, operation, and maintenance for 12 years of an all-electronic tolling system on the 72-kilometer Atlantic City Expressway.

 

RHB analyst Shekhar Jaiswal says the contract win will significantly boost ST Engineering&rsquo s order book for its urban solutions and security services (USSS) business, which has registered an average order win of about $340 million over the last six quarters.

 

&ldquo Given the long duration of the contracts, they should provide strong revenue visibility beyond the current forecast period,&rdquo Jaiswal writes.

 

The analyst also adds that this strong order book supports ST Engineering&rsquo s earnings growth beyond 2022, and he also estimates its profit growth for FY2023-FY2024 profit growth at about 14-17%, given a record-high order book, growing defence revenue, and USSS&rsquo s potentially sharp earnings recovery.

 

As for CGS-CIMB&rsquo s Lim Siew Khee and Kenneth Tan, they estimate that the contracts will add about $110 million per annum in revenue over the next 3-4 years, and thereafter $120 million per annum until FY2032-FY2034, assuming a 30% project implementation phase,

 

With the new contracts, ST Engineering&rsquo s order book currently stands at a record high of $24.6 billion, compared to $23.1 billion at the end of September.

 

Lim and Tan says &ldquo We view the order wins positively as they demonstrate confidence in Transcore&rsquo s tolling solutions from authoritative bodies.&rdquo

 

They are also positive about Transcore&rsquo s future order momentum, given its leading market share in the US electronic toll collection (ETC) industry, the recovery in domestic traffic volumes, and further scope for the rollout of ETC solutions in the US, given the current reliance on manned booths.

 

Moving forward, they also think the potential rollout of congestion pricing solutions in New York City in 2023 could spur further contract wins, given Transcore&rsquo s expertise in this field.