Thursday, 26 May 2022

Why ST Engineering is the Largest Non-REIT Holding in my Dividend Portfolio?

Singapore Technologies Engineering Limited, (ST Engg) is a global technology, defence and engineering group with offices across Asia, Europe, the Middle East and the US, serving customers in more than 100 countries.  The Group uses technology and innovation to solve real-world problems and improve lives through its diverse portfolio of businesses across the aerospace, smart city, defence and public security segments.  Headquartered in Singapore, ST Engg ranks among the largest companies listed on SGX, with Temasek Holdings Private Limited being the largest shareholder owning 49.78% of shares.

Prior to 2021, ST Engg's business can be broken down into 4 large segments, namely Aerospace, Electronics, Land Systems and Marine.  Their revenue and earnings are also reported based on these 4 segments.  However since 2021, ST Engg's business has been reorganised into Commercial and Defence segments.

What do I like about ST Engg that makes it my largest non-REIT holding in my dividend portfolio?

1)    It is a Temasek-Linked Company and Involved in Defence and Public Security

Yes, I know...  Temasek-linked companies does not necessarily mean that it will do well.  Look at Noble, Singapore Press Holdings (SPH), Sembcorp Marine etc, and that should eliminate “Temasek-linked companies” from the factors for consideration.  Moreover, based on latest FY2022 Q1 financial report, with 52.2% of their revenue coming from its Defence and Public Security segments, I believe the support from the government will make this part of revenue a solid base that will be minimally affected by any economic headwinds or downturns.  This is evidently shown during the Covid period.  Although the Aerospace and Marine segments are badly hit, overall revenue only fell by 9% for FY2020 compared to FY2019.  In its latest FY2022 Q1 business updates, ST Engg reported that its revenue from Aerospace and Marine segments have risen back to pre-pandemic times.  This proves its resiliency nature.

2)    It is a Conglomerate with Diversified Business

Yes, I know...  SPH, Sembcorp Industries, Keppel Corporation were all notable conglomerates listed on SGX.  SPH ended up being delisted (and now SPH REIT is being low-balled), share prices of Sembcorp Industries has plummeted from all time high of SGD 6.90 to SGD 2.85, while that of Keppel Corporation has also dropped from all time high of about SGD 13.40 to SGD 6.77 currently.  In my opinion, ST Engg is different, mainly because of its huge moat in its Defence and Public Security businesses, which with that alone, differentiates it from other conglomerates.  No business is more stable and well-supported by government than that.  This confidence level is reflected in its share price, which is hovering around SGD 4.00 currently, slightly down from its all time high of SGD 4.56 in April 2013.  With the sudden occurrence of Russia-Ukraine war, and the constant on-going tensions between China and Taiwan, every country is planning to buff up their Defence budgets.  I definitely do not wish to see any more wars happening, and I sincerely hope the Russia-Ukraine war can end soon, but nonetheless, these defence preparatory measures will be a plus point for ST Engg moving forward.

3)    Stable Quarterly Dividend Payout with Yield at about 4%

In its FY2021 financial report, ST Engg announced that they are changing their dividend policy from semi-annual to quarterly starting FY2022.  From 2016 to 2021, ST Engg has paid out a stable dividend of 15 cents every year, but for FY2022, they are committed to pay 16 cents of dividends, which translates to 4 cents per quarter.  This is good news for dividend investors like me because it makes the cashflow from dividends more consistent and regular, and the increase of 1 cent per share is definitely a great news welcomed by investors.  However, on important thing to keep a lookout on is its payout ratio.  As of FY2021, its latest payout ratio is 82.4%, which is on the high end.  Definitely, a Hyflux-like event is one that no one likes to see, and to prevent that, an eagle eye on the payout ratio is a definite must.

4)    It is a Good Diversification from REITs and Financials for Me

As shown in my portfolio quarterly update, my Dividend Portfolio is approximately 65% REITs and 24% financials.  With such a skewed portfolio, it is good for me to add a stable and diversified company for the remaining 11%.  ST Engg, which has involvements in aviation, marine, electronics and defence is definitely a great fit.

For a more detailed and in-depth analysis into ST Engg's financials, do read up the analysis by OCBC Research or by Financial Horse.

In conclusion, thus far, I am a happy shareholder of ST Engg.  I believe ST Engg can continue paying stable dividends in time to come, and as mentioned, I will keep a close lookout on its payout ratio.  During this period, I will continue to re-invest the dividends to buy more shares occasionally, but probably will only consider inject more capital into this company if share price plunge below $3.50.  At the meantime, I will continue to enjoy its dividends.  Barista FIRE, here I come...!