Singapore Technologies Engineering (STE), the global technology, defense, and engineering group, delivered a stellar performance in 2023, exceeding the coveted $10 billion revenue mark for the first time in its history. While the headlines focused on the strong growth in Commercial Aerospace and Defence & Public Security (DPS), a closer look at the transcript reveals a potential goldmine buried within the Urban Solutions & Satcom (USS) segment. Could this be the catalyst for a meteoric rise in STE's stock, turning it into the next 10-bagger?

The Satcom Restructuring: More Than Meets the Eye

The USS segment faced headwinds in 2023 due to weakness in its Satcom business, leading to organizational restructuring and a $32 million hit to EBIT. However, beneath the surface lies a calculated move that could unlock significant value. STE is aggressively transforming its Satcom business, iDirect, to address the rapidly evolving multi-orbit, cloud-converged landscape. This involves streamlining operations, focusing engineering efforts on a next-generation platform, and aggressively pursuing cost optimization.

The projected cash savings from these initiatives are impressive, ranging from $40 million to $60 million annually. More importantly, a significant portion of these savings will flow directly to the bottom line. While the 2024 EBIT improvement is projected to be $30 million, this will eventually reach $60 million annually as depreciation effects fade. This implies a potential doubling of Satcom EBIT within a few years, a dramatic turnaround from its current struggles.

But the story doesn't end there. The transformation goes beyond mere cost-cutting. STE is strategically positioning iDirect to capitalize on the burgeoning demand for satellite communications in a world increasingly reliant on ubiquitous connectivity. The focus on a single, multi-orbit compatible, cloud-native platform will enable iDirect to address diverse market needs, from traditional maritime and aviation customers to emerging sectors like cellular backhaul and land mobility.

This strategic shift aligns perfectly with the long-term growth prospects of the Satcom industry, projected to reach $230 billion by 2030. As STE successfully navigates this transformation, iDirect could become a major growth engine for the USS segment and the group as a whole.

TransCore: The Synergistic Powerhouse

Adding to the intrigue of the USS segment is TransCore, the intelligent transportation systems provider acquired by STE in 2022. TransCore already achieved earnings accretion in 2023, ahead of plan. This demonstrates the success of STE's M&A strategy, focused on acquiring complementary businesses and unlocking synergistic value.

The potential for cross-selling and leveraging combined expertise is immense. STE showcased this by winning a contract to implement a ticketless parking system at Dubai Mall, ingeniously combining TransCore's tolling expertise with STE's barrier-free smart parking technology. This demonstrates how STE can seamlessly integrate TransCore's capabilities into its broader smart city offerings, creating compelling solutions for a global market.

Moreover, TransCore is pursuing lucrative opportunities in urban congestion pricing, fueled by the successful implementation of the New York Congestion Pricing project. As cities worldwide grapple with traffic challenges and seek to reduce carbon emissions, STE is ideally positioned to capture this growing market.

The Hidden Gem Hypothesis: Numbers Tell the Tale

The potential for exponential growth within the USS segment is significant. If Satcom EBIT doubles within the next few years and TransCore continues its impressive trajectory, the USS segment could contribute $100 million or more to group EBIT annually. This would represent a substantial increase from the $10 million achieved in 2023 and could drive significant upside in STE's stock price.

The market appears to be undervaluing this potential. While STE's stock has performed well, trading at around 16 times earnings, this multiple does not fully reflect the potential explosive growth within the USS segment. If STE successfully executes its Satcom transformation and capitalizes on TransCore's synergistic potential, the USS segment could become a significant driver of value, leading to a substantial re-rating of the stock.

Segment Performance

Here's a breakdown of the segment performance for ST Engineering based on the Q4 2023 earnings call transcript:

Projected EBIT Growth in USS Segment

The chart below illustrates the potential EBIT growth in the USS segment based on the projected improvements in Satcom and continued growth in TransCore:

Conclusion: A 10-Bagger in the Making?

STE's 2023 results highlight the strength of its diversified portfolio. However, beneath the headline numbers lies a hidden gem within the USS segment. The aggressive Satcom transformation and TransCore's synergistic potential represent significant catalysts for growth. If STE successfully executes its strategy, the USS segment could propel the group to new heights, potentially turning STE's stock into the next 10-bagger.

Investors looking for a company with strong fundamentals, a clear vision for the future, and a potential for explosive growth should take a closer look at STE. The hidden gem within the USS segment could be the key to unlocking extraordinary returns.

"Fun Fact: Did you know that STE's technology is used in over 100 airports worldwide, making air travel safer and more efficient for millions of passengers every day?"