ST Engineering makes up 12.6% of my stock portfolio. If you are not familiar with this company, it derives its revenue from four key business segments: Aerospace, Electronics, Land Systems and Marine.
After ST Engineering has held its Annual General Meeting on 15th May 2020, the share price of ST Engineering has started to decline as investors started their sell off because of the impact of the COVID-19 pandemic to ST Engineering’s businesses.
First, let us understand how the COVID-19 pandemic has impacted ST Engineering. Second, how the company tries to mitigate these factors. The last is what the company is doing to keep investor’s confidence?
1. How COVID-19 Pandemic Has Impacted ST Engineering?
The COVID-19 pandemic has impacted ST Engineering in three areas: reduction in customer demand, supply chain and workforce disruptions. ST Engineering expects the Aerospace and Electronics sectors to experience more impact than Land Systems and Marine sectors. Land Systems and Marine have a higher portion of defence related projects, which collectively have provided revenue stability.
In the Aerospace sector, we have read about commercial planes being grounded and airport closures. ST engineering expects lower demand for airframe and engine and component MRO (maintenance, repair and operations). The production manufacturing timeline for original Equipment (OE), largely the engine nacelle manufacturing and composite floor panel manufacturing needs to be shifted to follow its customers timeline. The income stream from military customers continues to be steady.
In the Electronics sector, ST Engineering experienced deferments in some projects and tenders previously launched are now being placed on hold. These are due to travel and movement restrictions imposed in the countries they serve.
In the Land Systems sector, the defence related projects continues to provide revenue stability. Similarly to projects in the electronics sector, projects in its commercial business are deferred.
In the Marine sector, ST Engineering’s yards in Singapore and the U.S. are still operating, albeit on a reduced scale in Singapore mainly due to the workforce disruption.
2. Mitigation Measures Taken
ST Engineering has a diversified income streams from different business sectors and geographies. The income is further differentiated between customers from the commercial and military defence. As mentioned previously, the income from the military defence customers remains steady.
The directors have taken a cut in their director’s fees. As of 1st May 2020, the President and CEO will reduce his salary by 10%, while the senior management team will reduce their salaries by percentages ranging between 5% and 10%.
The group has received also support from various government aids and stimulus packages.
For the nine months from April to December 2020, the group expects to recognise $4.5b from the order book of $16.3b as of 31 March 2020, after delivery for the first quarter.
What is the company doing to keep investor’s confidence?
It is heartening to know that for the past seven years, ST Engineering has been consistently paying out 15 cents per share. This is also the reason why I am not selling away. The group has assured they have a strong balance sheet to sustain long-term growth and they will want to continue rewarding its shareholders by creating long-term shareholders’ value.