Can ST Engineering’s Dividend Increase After Clinching a S$430-Million Contract?
2022 was a strong year for Singapore Technologies Engineering (SGX: S63), or STE.
The blue-chip engineering and technology group clinched a total of S$13.1 billion in contracts last year, lifting its order book higher by 31% year on year to $S$23 billion.
The group’s contract-grabbing momentum has continued into this year as it recently announced a S$430 million contract win for providing rail services in Kaohsiung, Taiwan.
Parked under its Urban Solutions division, STE will commence the project in mid-2023 and will complete it by 2030, adding to the division’s impressive global track record of 200 smart metro projects in more than 50 cities.
This contract win should contribute positively to STE’s top line from this year onwards.
Income-seeking investors, though, will be curious to know if the engineering conglomerate has room to raise its dividends.
STE had just raised its annual dividend recently to S$0.16 from S$0.15 and is now paying out a quarterly dividend of S$0.04.
Let’s take a peek at the group’s financials and recent corporate events to determine if it can pay out more.
A peek into its financials and cash flow
STE reported a strong set of results for 2022, with revenue rising by 17.4% year on year to S$9 billion.
All its three segments posted year on year revenue growth, with Urban Solutions & Satcom (USS) seeing the sharpest jump at 49% to hit S$1.77 billion.
After excluding government support and TransCore acquisition and integration expenses, STE’s operating profit surged by 55% year on year to S$729 million.
Adjusted net profit was 39% higher year on year at S$549 million.
If the one-off expenses were included, STE’s net profit would have dipped by 6.2% year on year to S$535 million.
Earnings per share would have slid by the same quantum to S$0.1718.
For 2022, STE also generated a negative free cash flow of S$293 million, reversing the positive free cash flow of S$685.5 million in 2021.
Bulking up on contracts
The good news is that the engineering group has made substantial progress in bulking up its order book.
Back during STE’s November 2021 Investor Day, management affirmed that the group will try to grow its annual revenue at two to three times the annual GDP growth rate to hit S$11 billion by 2026.
At S$9 billion last year, STE is inching closer to its target.
Its contract wins have also steadily increased over the years.
2022 saw S$13.1 billion of new contracts secured across all three of its divisions, more than the S$11.7 billion snagged in 2021.
This level of contract wins was also higher than 2020’s S$8.2 billion and 2019’s S$9.5 billion.
Of its S$23 billion order book as of 31 December 2022, S$7.2 billion is expected to be delivered this year.
While snagging contracts is good news for investors, a key variable to watch for is the margin that STE can obtain for each contract.
This margin will determine the net profit and cash flow the group can generate, which ultimately affects how much it can pay out in dividends.
Becoming a leaner machine
Aside from winning contracts, STE has also become leaner over the past year.
Last November, it divested its two US Marine businesses for around US$15 million as the division incurred an annual loss of around US$40 million to US$60 million over the past five years.
Four months later, STE’s Marine division acquired a new site in Singapore’s 55 Gul Road for S$95 million to expand its Singapore commercial ship repair business.
This new yard will replace its Tuas Shipyard when its lease expires in 2024 and will be upgraded to become a “smart” shipyard, utilising digitalisation to power the ship repair cycle and various processes.
Unlike its US counterpart, the Singapore marine division is profitable over the years and continues to grow.
Get Smart: Patience is needed
Collating the facts above, it seems unlikely that the engineering conglomerate will raise its dividend in 2023.
Based on earnings per share of S$0.1718, the dividend payout ratio stood high at 93.1%.
Furthermore, the group also generated negative free cash flow for 2022.
Its TransCore acquisition could be accretive this year and may contribute to earnings and cash flow.
Investors need to be patient to see if STE continues to clinch contracts and to assess if it can generate decent margins from them.
If the group’s financial numbers for 2023 are attractive, there is a good chance it can increase its dividends from 2024 onwards.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
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