Singapore Technologies Engineering Ltd (OTCPK:SGGKF) Q2 2021 Earnings Conference Call August 11, 2021 11:00 PM ET
Sylvia Lee – Manager, IR
Cedric Foo – Group CFO
Vincent Chong – Group President, CEO & Director
Jeff Lam – President & Head, Commercial Aerospace
Serh Ghee – Group COO, Operations Excellence & Chief Commercial Officer
Ravinder Singh – Group COO, Technology & Innovation and President of Defense & Public Security
Conference Call Participants
Rahul Bhatia – HSBC
Rachael Tan – UBS
Siew Khee – CIMB Research
K. Ajith – UOB
Lorraine Tan – Morningstar
Jame Osman – Citigroup
Zhiwei Foo – Macquarie Research
Good morning, ladies and gentlemen. Welcome to ST Engineering’s First Half 2021 Results Briefing. Joining us at this briefing this morning are our Group Executive Committee members, Mr. Vincent Chong, Group President and CEO; Mr. Cedric Foo, Group CFO; Mr. Lim Serh Ghee, Group COO and Chief Commercial Officer; and Mr. Ravinder Singh, Group COO and President of Defence & Public Security.
Cedric will start this briefing with a presentation of our 1 Half 2021 results performance. Following that, we will invite our Group Executive Committee member for a Q&A session.
Without further delay, I’ll hand over to Cedric. Cedric, please.
Thank you. A very good morning to all of you who are dialing in to this ST Engineering’s first half 2021 results. First, the agenda. I will first cover the new segment reporting, then the group highlights and then the outlook and followed by some of the segment highlights as well.
First, the new segment reporting. Before that, of course, we have the usual disclaimer about forward-looking statements, which I would like to bring your attention to. Next, please.
New segment reporting. In January this year, we reorganized the group into 2 clusters, replacing the previous 4-sector structure. The purpose of the organizational redesign is to deepen our customer engagement. For example, in the Defence & Public Security cluster, or DPS, as we call it, we brought together capabilities in air, land, sea, digital and cyber, a multi-domain approach to better serve our defense customers.
As a result of the reorganization, we would henceforth be reporting financial results based on 3 segments. As you can see from your slide, first is Commercial Aerospace, abbreviated as CA; second is Urban Solutions & Satcom, which is satellite communications, abbreviated as USS; and Defence & Public Security, abbreviated as DPS.
We recognize that analysts would need time to adjust to this new segment reporting but do feel free to reach out to us or our IR team at any time if you need clarifications.
We have, of course, also reset and rebased pro forma first half 2020 to resemble this new structure to allow analysts to have a like-to-like comparison of the results. We do hope, though, that with this new approach, we will actually be providing you better insights into how each segment is performing.
Below the three segments are nine subsegments. Each of this subsegment is a collection of lines of businesses that share a similar market, a technology stack and competitive forces. I think that way, analysts can compare our subsegment performance with peers in the industry. With this new reporting format, we will provide revenue and EBIT visibility for Commercial Aerospace, USS and DPS. These were previously not available.
Of course, at the group level, we will provide all the financial statements, including P&L, cash flow and balance sheet, down to the net profit level. Next, group highlights. I’m happy to report that for the first half of 2021, the group delivered a set of good results. Revenue stood at $3.7 billion, which is an increase of 2% year-on-year despite a very challenging year. Our commercial aerospace was not fully impacted in the first quarter of 2020. And therefore, first half of 2020 was a high base against which our first half 2021 results were measured against.
EBIT was higher at 13% and stood at $355.1 million, while PBT, profit before tax, increased even more by 19% or $339.8 million on the back of lower finance cost. Net profit grew in tandem by 15% to $296.1 million.
Next, we move on to the breakdown of revenue. On the first chart to your left, Commercial Aerospace constituted 31%, USS 15% and DPS 54%. DPS includes defense, public security, critical information infrastructure, commercial businesses as well, covering both local and overseas markets. Therefore, from the bar chart in the middle, the defense revenue, as you can see, has grown from $1.04 billion to $1.42 billion in first half 2021. And the $1.42 billion is merely a subset of the DPS revenue share of $2 billion for the slide – for the chart on the right – on the left – on your left.
The group’s commercial revenue decreased to $2.24 billion since it was operating at the trough of the business cycle due to COVID impact. Nevertheless, this drop is compensated by defense revenue increase, which is independent of business cycles. The diversity of our business portfolio has served us well. For the slide on the – on your right, in terms of geographical spread of revenue, Asia constituted 59%; the U.S., 21%; Europe, 15%; and others, 5%.
Commercial Aerospace revenue dropped by 10% as the first quarter of last year was largely unaffected by COVID. So the first half of 2021 is compared to a high base of first half 2020. The decrease in Commercial Aerospace revenue was more than compensated by increases in USS and DPS revenue by 12% and 8%, respectively. So overall, group revenue grew by 2%. This is another way to depict how USS and DPS more than offset the drop in Commercial Aerospace revenue of $131 million.
Next, we will move on to discuss the group EBIT, or earnings before interest and tax. Commercial Aerospace EBIT increased by 37%, helped by government support as well as cost reduction and productivity measures. USS EBIT turned positive due to higher revenue and lower operating expenses amidst a very challenging business environment for this half. We do expect, though, that this segment to improve further over time. DPS EBIT was lower at 7% due to lower government support, partially offset by better operating performance.
We have also decided to strip out the effect of government support, and we will see that in the next few slides. Hopefully, this will give you better transparency of the base operating performance of each segment without government support. So let’s isolate the effects of government support to better understand the base operating performance. First, the slide on the left. In first half of 2021, the group received $11 million less government support. So this is the delta of government support, $11 million less first half ’21 compared to first half 2020.
So having stripped out the change in government support between these 2 period, these 2 first half, the rest of the bar chart under CA, DPS and USS basically are now without the effect of government support.
Commercial Aerospace recorded $25 million lower EBIT. As I said before, as first quarter 2020 was not impacted by COVID. This was more than offset by $78 million of DPS and USS higher base operating performance. Net profit grew by 15% in tandem with EBIT. And that’s on the slide to your right.
Next, let’s dip even further and look at changes in government support for each of the segment. For the first slide on your left, Commercial Aerospace. This chart shows the impact of government support on each of the business segments’ EBIT in first half 2021 as compared to the prior year. The first chart, Commercial Aerospace benefited from higher government support of $53 million to come in higher in EBIT of $103 million. Without government support, Commercial Aerospace base operating performance drops $25 million as first quarter 2020 was without COVID impact, whereas first half 2021 was with the full COVID impact.
Next, the variance for government support for USS is not significant at $6 million lower. USS recorded a turnaround of $38 million, the bar in green, to post an EBIT of positive $11 million. DPS had a $58 million drop in government support as it was not in a similarly heavy impacted space as aviation and aerospace. But this reduction was partially offset or largely offset by better base operational performance, and DPS posted the highest EBIT of all segments of $242 million.
Next, new contract wins. This is a table that shows the new contract wins for second quarter 2021. In the appendix, you will find new contract wins for first quarter 2021. In all, we secured a total of $1.8 billion of new orders in second quarter 2021, and this figure does not include contract, which carries customer confidentiality clauses.
Commercial Aerospace, for example, had 1 total contract value of $874 million just in the second quarter; USS, $284 million; and DPS, $660 million. Rather handsome wins in a very difficult and challenging market.
This contract win adds to our order book. So we ended the first half 2021 with $16.8 billion of order book. This is a figure which is higher than the pre-COVID level of $15.3 billion in December 2019, and it provides us good revenue visibility in the periods ahead. $3.6 billion of this order book will be recognized as revenue in the second half of 2021.
Next, let me update you on government support expectations in the next slide. So early this year, we shared the government support for the whole year of 2021 was expected to be lower by $250 million this year compared to 2020. So in other words, the first bar, in 2020, we received $350 million of government support from various countries. In 2021, we expect to receive $100 million. That was our earlier estimate, and therefore, the reduction in government support is $250 million expected.
However, we would like to update now, an additional $100 million of government support is expected to be received this year, and the previously expected reduction in government support of $250 million is now revised to $150 million. which is the red bar outside the rectangle box. And as you can see, most of these will be manifested in the second half.
Nonetheless, the group has been very focused on how to wean ourselves away from such government support and as of last full year results discussions, we have undertaken many cost reduction and productivity measures whilst also have our eyes to emerge stronger as the cycle turns.
Our cost saving targets of $180 million for the full year 2021 is well on track. We do expect, though, to reinvest part of these savings to capture business growth, including areas like digital business, new hangar lines in Pensacola, as you have read about, and setting up of passenger-to-freighter lines in various locations around the world. This obviously is to capitalize on new growth when the cycle turns.
We target to more than offset the reduction in government support, now revised at $150 million reduction, through these cost savings as well as partial business recovery in the course of the year.
Finally, let me leave you with the CEO’s statement, and I’ll just briefly read out the statement. We delivered a good set of results for the first half of 2021 amidst a challenging operating environment. We had also secured contract wins across our businesses that led to a robust order book, which continues to provide revenue visibility in the periods ahead.
We remain steadfast in the pursuit of our strategy to emerge stronger as the business environment improves. The diversity of our business portfolio and our focus on seizing new opportunities, new growth opportunities, coupled with productivity and cost management measures, will continue to position us well into the future.
So with that, thank you for your attention. I now pass back the time to Sylvia to invite the other panelists.
Thank you, Cedric. May I invite the rest of the Group Executive Committee to join Cedric at the head table, please? [Operator Instructions].
Before we open up the floor for Q&A, let me invite our Group CEO, Mr. Vincent Chong, to deliver his remarks. Vincent, please?
Yes. Good morning. Can you hear me well? I assume you can. So good morning, and thank you for calling in and joining our first half results briefing this morning. As you have heard from Cedric, this set of results is reported under the new financial reporting framework that reflects our organizational structure that has been in place since January of 2021. The framework is based on how we drive our management stewardship and accountability for the respective business areas, and it is consistent with the framework which we shared with you in February this year.
Now I appreciate that there will be a period of adjustment as you get familiar with this new reporting framework, and we will endeavor to address your questions and queries to the extent possible. Now under this reporting framework, Commercial Aerospace, Urban Solutions & Satcom as well as Defence & Public Security constitute the 3 reportable business segments for which we report their respective revenue and EBIT. At the subsegment level, we report only revenue.
Moving on to our first half performance. We delivered a good set of results amidst a challenging operating environment with year-on-year growth. Group revenue was up 2%, group EBIT up 13%, while group PBT and net profit grew 19% and 15%, respectively. The revenue growth in Urban Solutions & Satcom as well as Defence & Public Security segments more than offset the revenue decline of Commercial Aerospace compared to first half of 2020. Likewise, on net profit, the better operating performance of Urban Solutions & Satcom and Defence & Public Security and lower finance costs incurred more than offset the weaker operating performance of Commercial Aerospace, lower government support received and high year tax expense versus the same period last year.
We grew in sequential halves, too. Compared with 2 half – or second half of 2020, group revenue was up 2% in first half 2021, PBT up 37%, and net profit grew 12%. And this is despite lower government support but on the back of partial recovery across segments, including Commercial Aerospace. So we are talking about first half 2021 versus second half of 2020. Now this comparison is not found in the current set of presentation slides but the figures are disclosed in our reports or can be readily calculated.
To summarize, there are signs of recovery across business segments, especially in Urban Solutions & Satcom, albeit from a low base market bottom. Commercial Aerospace is still impacted by the subdued aviation industry, as we all know, but pent-up domestic travel has led to an uptick in MRO demand in several markets, especially in the U.S., which resulted in our improved performance.
Underlying operating performance of our business segments has strengthened as we post stronger year-on-year and sequential halves’ profits against lower government support received in this first half versus second half of 2020. Our disciplined cost management efforts also contributed to the stronger results in first half of 2021. Our diversified portfolio, which includes the steady and robust defense business, continues to be a key strength of the group, providing us with resilience against the challenging external factors.
On government support received from our global operations, we now expect the reduction to be at $150 million instead of $250 million we called out earlier this year. So Cedric has walked you through this reconciliation early on. The impact of the reduction will mainly manifest in the second half of 2021.
So I know at this time, some of you are likely trying to work out the sums on the positive impact of additional government support on our bottom line. We will say that the extra support will help partly offset the delay and actually recovery of COVID-19, especially for our Commercial Aerospace segment, which still experiences under absorption of our overhead costs in Commercial Aerospace.
This additional government support also allows us to reinvest for growth, for example, in more passenger-to-freighter conversion lines, invest further in building the teams in high-growth areas like cloud, cybersecurity and data analytics as well as pursue various growth initiatives across the group.
Next, I will move on to business highlights. On Commercial Aerospace, global recovery of the aviation sector remains unsteady and uneven due to threats of the Delta variant of the COVID-19 virus stalling recovery after early rebound. In the first half of this year, improved domestic air travel, particularly in the U.S., led to an uptick in demand for MRO service. Our airframe MRO services saw the return of maintenance work from airline customers driven mainly by their domestic fleet. Input from freighter airlines have remained strong throughout the pandemic period.
In comparison, recovery of our components and engine MRO businesses have been relatively slow in 2021 as many operators are still preserving cash by using their spares with green time left. We expect operators to send in their components and engines towards the latter half of 2022 when green time is used up. We also expect there to be pent-up demand at that time, which we will be ready to help meet by leveraging our international network of facilities.
Overall, our MRO facility, our capacity utilization rate is still above 2/3 on average with our airframe facilities operating at well above 80% utilization. Now even in this climate of slow recovery, we have stepped up on our investment for growth. In July, we finally started construction of our second hangar in Pensacola, Florida, which has been delayed due to the pandemic. When fully completed, the expansion will add 3 state-of-the-art large hangars and associated support shops and around 1.5 million man hours to our annual airfreight maintenance capacity.
On passenger-to-freighter conversion, we are on plan to induct about 30 aircraft for conversion this year. Next year, we’ll be inducting over 55 aircraft instead of the 40 aircraft, which we last shared. Now this is indicative of a significant ramp-up in demand and the results of the investment we have been making to increase conversion capacity and the line – number of conversion lines. All our slots for A330 passenger-to-freighter conversion have been booked through 2023. And we are fully booked through mid-2024 for our A320/321 program.
Next, on Smart City-related businesses. Our urban solutions team is seeing a cautious resumption in business activities in areas pertaining to smart mobility and infrastructure projects. That said, in the first half, we made foray into new markets, including Australia, with our first rail electronics contract to provide platform screen door solution for Queensland’s Cross River Rail and in Egypt for the 10th of Ramadan City railway with our first passenger information system project there.
In the near term, we see potential in Singapore, Southeast Asia and the Middle East and Latin America for projects relating to road traffic management, infrastructure, security and border control, smart street lighting and smart meter infrastructure as well as smart building estates.
On satcom, or satellite communications, we are seeing progressive recovery in business activities across most of its market segments, such as cellular backhaul, media and broadcast, enterprise and defense and government. However, the mobility segments of aviation and maritime crews remain challenged as we would expect. On the other hand, there are new opportunities from large projects arising from satcom ground infrastructure buildup, be it new constellations or infrastructure upgrades and expansion.
I want to call out that even as we were working towards recovery in the first half, parts of urban solutions, particularly its IoT business and satcom, were impacted by the global chip shortage. And as you already know from news report, many top chipmakers and analysts expect the chip shortage situation to last for a while through 2023.
Now we’ve been working hard on alternative supply chain and engaging of our customers to adjust project milestones and delivery schedules where needed. I must also clarify that the impact on the – at the group level is not material from this shortage, but we are working very hard to mitigate the impact on the concerns.
Next, on Defence & Public Security. There are 2 parts to this cluster. defense as well as public security, as the name implies, comprising businesses in digital systems and cyber, land systems, marine and defense aerospace. Now overall, the businesses in this cluster are more resilient compared to the commercial businesses and are also less impacted by COVID-19.
As Cedric also mentioned during his presentation, we’ve highlighted how COVID-19 has opened up new opportunities for our digital and cyber businesses as governments and enterprises who ramp up their focus on protecting their IT and OT infrastructure. We continue to see good momentum in our cyber business driven by new wins to deliver cybersecurity operation centers for critical infrastructures in Singapore and strong demand for our cybersecurity products and solutions.
Our cloud solutions business has also been gaining traction with new customer wins in the regulated industry and essential services sector.
I now move on to new contracts and order book. In the first quarter, we announced $1.55 billion of new contracts. The contract value for the second quarter was about $1.82 billion, comprising $874 million from Commercial Aerospace, $284 million from Urban Solutions & Satcom and $660 million from Defence & Public Security, as Cedric’s slide earlier on showed. Now these figures exclude undisclosed wins due to customer confidentiality reasons.
Now new contracts for the 2 quarters in first half of 2021 added up to $3.37 billion, excluding undisclosed wins. In the second quarter, Commercial Aerospace clinched new contracts across a spectrum of its aviation, manufacturing and MRO businesses, including passenger-to-freighter conversion orders for A321 PTF and A330 PTF from freight operators and lessors, a 5-year airframe heavy maintenance contract to support an Asian – Asia Pacific airlines Boeing 787 fleet, an engine heavy maintenance contracts from Alaska Airlines and an Asian airline.
Urban Solutions & Satcom won contracts from global customers for smart mobility, smart utilities and smart security as well as satcom. These include the group’s first rail electronics contract in Egypt, which I highlighted earlier, as well as smart utilities and integrated security management systems for government agencies in Singapore. Satcom business also clinched various contracts across key market verticals.
The business segments of defense and public security clusters secured various contracts, including the construction of T-AGS 67 Oceanographic Survey Ship for the U.S. Navy, supply of cybersecurity products and solutions as well as deployments of mission-critical and data analytics systems and cloud managed services for government agencies, enterprises and defense customers.
Together with other contracts won but not disclosed and after adjustments of revenue delivery and project cancellations, we ended the first half with a very robust order book of $16.8 billion. We expect to deliver about $3.6 billion from the order book in the remaining months of 2021.
As Cedric mentioned, we remain steadfast in the pursuit of our strategy to emerge stronger as the business environment improves. The diversity of our portfolio and our focus on seizing growth opportunities, coupled with the productivity and cost management measures, will continue to position us well into the future.
Lastly, our Board of Directors has approved an interim dividend of $0.05 per share payable to shareholders on 31st of August.
On that positive note, I would like to open the floor for Q&A.
A – Sylvia Lee
Thank you, Vincent. Okay. We have a few analysts waiting on the line. May I invite Rahul to ask your question?
I have three questions. First, very quickly, on government grant. Could you share absolute numbers of grant by division for 1H 2021 or give us a rough idea on proportion by division? Because I think that will help us to better understand the margins.
Second, if I compare your presentation with the 2020 results, you did not mention about the impact on positive from partial business recovery. Has your view changed in the last few months on that? And finally, on Commercial Aerospace and USS. Could you talk about your expectations of near-term outlook for both?
Rahul, this is Sylvia. I’m sorry, but your first question was disrupted. Would you mind repeating your first question, please?
Yes, absolutely. So my first question is on government grant. Could you share absolute number of grant by division for first half 2021 or give us a rough idea on proportion?
Yes, Rahul, thank you for the question. I’d like to point your attention to Slide 13, 1 3. We did strip out the effects of government support for each segment. So for example, Commercial Aerospace, the government support for first half 2020, the change in government support for first half ’21 versus first half 2020 was $50 million positive. And therefore, the base operating performance drops by $25 million.
For Urban Solutions & Satcom, the drop is only a mere $6 million of government support, and the base operating performance is a positive $38 million. And for DPS, the drop is $58 million in government support but the base operating performance make up a large part of that drop of $40 million.
So I think at this level, we did disclose, and I hope it will be helpful to the analysts to understand each of these segment’s EBIT in the absence of government support. And as I said earlier, also in a different slide, we are well poised to offset this revised drop in government support of $150 million through 2 ways. One is cost savings, which we are well on track, of up to $180 million this year. And secondly, past year business recovery.
Your second question is, can we quantify what is this partial business recovery? I think the year is not over yet. We do see some green shoots here and there [Technical Difficulty].
Yes, on Commercial Aerospace recovery. Still evolving, if I may use that term, yes. Okay. Thank you for the technical assistance as we get used to the setup.
Okay. So as you know, the aviation industry is still evolving. The recovery is still evolving. There’s the Delta variant. We see some strong recovery in the domestic air travel side, especially for U.S. But then elsewhere in the world that are affected by Delta variant, it is still quite a dynamic situation. Although as I mentioned, right, compared with second half of 2020, our aerospace revenue actually went up by 7% in first half of 2021. So that’s a good sign.
But we’ve got to watch this space and see if the COVID situation can get a little better over the coming months. And also importantly, travel protocols, how they get buttoned down across various countries. That’s also critical in supporting the recovery of the aviation aerospace business. But because of our diversified portfolio, even for our aerospace, commercial aerospace business, we are actually doing our level best to stay as resilient as we can amidst this very challenging environment because we also have our freighter customers that come to us for maintenance. And as you know, the freighter business – freight forwarding business is actually doing very well, also supported by the e-commerce that has been strengthening in the last 1.5 years because of the COVID situation.
We also have a lot of growth opportunities in the passenger-to-freighter conversion business where we are reinvesting some of our savings in growing more lines. And as we do that, surely, we have some near-term cost implications. But in the medium term, it should help us to recover very well when the situation brightens out. I’ll let Serh Ghee and then Jeff to see whether you have anything else to add on the commercial aerospace.
Unidentified Company Representative
No, I don’t.
Yes. Okay. Thank you, Rahul.
Thank you, Rahul. We have Rachael Tan from UBS waiting on the line as well.
This is Rachael from UBS. I’d like to commend you for a resilient set of results. Also, would like to express my appreciation for your increased disclosures. It’s a bit confusing, but I expect that we will – I can chip away at it. So my first question is on the government grant side. Where does the $100 million increase come from?
We do operate internationally. Of course, as you know, for aerospace site, we operate in Singapore, in China, in the U.S. and various – even in Germany. So we do get grants from various countries and not just from Singapore.
Okay. But for the – like for the – for the bulk of it, is it attributable to 1 particular country or business?
I think the – if you’re referring to the additional revised grant of $100 million, most of these are from outside Singapore.
Okay. And I guess in terms of like – from your perspective, like when were these grants and increases, when were they announced?
Okay, Rachael, maybe let me try. Overall, we expect lower government grant in 2021 versus 2020. Originally, we expected the drop to be $250 million. Right now, we expect the drop to be $150 million because there is additional government grants that we received primarily outside of Singapore, primarily outside of Singapore. And in first half of this year, and you saw our waterfall chart, we received $11 million less government grant.
In second half of 2021, we expect lower government grant of about $139 million versus same period last year, that means second half of 2020. And if you recall last year, we received $350 million. So you can roughly calculate what kind of government grant you will get – that we will get or we expect to get in 2021, second half of 2021. Okay?
I hope that helps, Rachael. But it’s very heartening to hear that you appreciate that we are moving to the new framework, and there’s actually more visibility in some of our verticals, which is in alignment with our – the way that we steward our business and pursue our strategy and over time, will help the investor community adjust to the new format. But meanwhile, we also restating our 2020 results in accordance with the new format so that you can do the appropriate comparison, right, Rachael?
Yes. So yes, thank you for that. In terms of the government grants. I note that there are some booked under the administrative expenses. Are all your grants booked on that line? Or where can – where else are they booked?
Yes, they can be booked under various lines like even cost of sales as well as admin expenses and so forth. So basically, it goes to offset staff cost.
Okay. Okay. Okay. So in terms of – with the additional $100 million government support, right, from a very kind of like simple analyst point of view, does that mean that we should just like add $100 million to our net profit expectations?
Well, Rachael, that was what I was alluding to earlier on. I said many of you are likely to be doing the math and add $100 million. But we are reinvesting in our business, as you – as I mentioned. The additional grant that we didn’t expect originally that now we’re expecting is certainly helpful, and we really appreciate the support from the various governments in the countries that we operate in.
We say that it will be used to, I think, offset the very unsteady and dynamic situation in Commercial Aerospace. As you know, there’s a lot of start-stop there. But we’re also using the additional grant to reinvest in the business, especially setting up more passenger-to-freighter conversion lines, recruiting more talent in higher growth areas like cloud, cybersecurity, and there is competition for talent and resources in this very high-growth segment. And then we’re also reinvesting in various other growth channels in response to the recovery that we are seeing. So it’s – it would not be to your specific question, the math is not the way that you have described. But we are certainly very appreciative of the additional grants that we have gotten. And the year is not – sorry, and the year is not over. We are not at liberty to give an outlook of the profit situation for the full year.
Okay. Fair enough. I’ll stop poking on that front then. So for your Urban Solutions & Satcom, were there any one-off items that led to the loss? And which subsegment did this originate from?
The negative EBIT in 2020, are you referring to that? Because first half, we were positive. So maybe…
Yes, sorry, last year, last year.
Yes. Last year, first half, as you know, the COVID hit and a lot of projects that Urban Solutions & Satcom were undertaking were shifted to the right, and there were also some project cancellation. So it was a very challenging period for Urban Solutions.
Satcoms as well, as you know, many of our customers in iDirect in the U.S. are from the aviation and maritime industry. And they were also impacted quite badly due to COVID in the first half last year. We’re seeing some recovery. That’s why there’s a $38 million turnaround for first half 2021 versus first half 2020. I would reiterate that we expect the performance of USS to improve and also the margin to improve, both top line margin to improve over time.
Thanks, Cedric, for that answer. And keep in mind that our commercial cluster businesses, right, are coming out from a bottom of the market situation. Especially last year in the thick of COVID-19, the commercial businesses are more impacted than the defense side of the business, as I mentioned. So we are – you will see progressive recovery. We are seeing some good recovery. Over the longer term, I think we are positive about the growth prospects, and we’re already seeing it, as shown in the first half 2021 versus second half 2020 results. Right, Rachael?
Okay. I have two more questions. Should I just jump back in the queue? Yes, I think I’ll just jump back in the queue.
Thanks, Rachael, for your understanding. We’ll come back to you shortly. The next question comes from Siew Khee from CIMB.
Can you hear me?
Loud and clear.
Okay. I’ll just talk – can I just continue with the government grant discussion a bit? Will this additional – or do you have any visibility in terms of 2022 grant, especially you were positively surprised by the non-Singapore grant? Will this be extended to 2022? And how would you see a 2022 growth with the lack of $200 million in overall grants help?
We have no visibility about 2022. In fact, the additional $100 million of revised government grant were only known also recently. So we really have to – we will only know when they are announced by respective government. Your second part of the question is how do you then overcome the lack of government grant in 2022 now that you got a bit more in 2021. And as we said, even as far back as last year, that we are very, very focused on how to wean away from the government grant. And we are trying to do that in a smart way in the sense that while we improve productivity and reduce cost and size our costs according to our business volume, we must also have an eye on the future. So the business cycle will obviously turn. And when it turn, we don’t want to be caught flat-footed, not having the capacity or the talent to capture the growth. So we need to strike the right balance between these two.
But having said that, I think let me reiterate that the $180 million savings is on track. And we think 2022, the recovery will be better than second half 2021. So a combination of these measures. And as well as additional productivity measures are underway to make sure that we are not over reliant on any government grant. We need to run the business without government grant and compete effectively without that.
Okay. So that means if I have to look at…
Serh Ghee wants to add a few points.
Just a few points. First of all, I think our preference definitely is towards business recovery rather than government grant. Then as far as all the business entity are concerned, we are very clear-minded that to stay in business, we are to pursue operational excellence, one of which is a key focus area is cost effectiveness. And during this time, which is unusual but is not – I would say not atypical for us to really see ways that we can improve our cost effectiveness. And we have actually generally looked at areas where there are lesser work. We actually not just freeze head count, but we also size the workforce in accordance to the work demand largely through the throttling back of over time as well as the reduction of outsourcing of labor.
So operational excellence is also – I think, just want to reiterate, it’s not all about reducing costs. We also have to make judicious investment to be able to have a sustainable cost effectiveness. One good example is that we actually invested in robotic drilling machine to improve our passenger-to-freighter conversion.
Okay. Sorry, Vincent, you have something.
I can add to what Serh Ghee said, if you want me to. But I mean, it is true that we have remained very steadfast in our focus to be cost-efficient, to be very productive. And then coupled with recovery, we continue to be optimistic that we will stay even-keeled. The year is not over and the situation is evolving, but no short of focus in also reinvesting some of the savings for growth so that we are well positioned as the recovery continues.
So all these are, I would say, parts of our holistic plan to continue delivering value to our shareholders. And we are pretty, I think, heartened by the results so far, and we’ll continue to chip at it.
That was my first question. So can I just check, when I look at the new presentation, how do I tie – for instance, for aerospace, for Slide 23, you actually break it down into the subsegments for us to see how individual subsegment has been performing. So I know that in – on this slide, it actually includes a lot of intersegment and intersubsegment sales as well. So if I were to add $551 million to $619 million and $900 million, I get over $2 billion of revenue, and that means I have like $900 million of intersegment sales to tie back the entire amount to $1.136 billion for Commercial Aerospace? Or how do I like read that? I just want to make sure that I’m not like wet in terms of my intersegment.
Siew Khee, just to be very clear. On aerospace, right, Slide 23, the graph on the far right is on asset under management, it’s not revenue. So you won’t add up that one. And then – yes, okay, that’s asset under management. The headline says AUM instead of revenue because this – for this part of the business, AUM is a more meaningful portrayal of the underlying business. So that’s AUM. I hope that helps.
That’s very helpful. Sorry, my bad on that. Okay. Okay. So then moving on to – because now you give us the EBIT breakdown. So I would just have to ask from what you give us, right? In terms of aerospace margin, right, so it has actually gone up to 9%. Why is that so? And is it mainly because of the surprise JSS? And if it is then, of course, this would then be similar in the second half. But what is the sustainable margin for aerospace EBIT?
So if you are referring, Siew Khee, to Slide 21, right? So Slide 21, the EBIT of $102.6 million, 37% better than first half last year, is due to higher government support but offset partially by lower revenue as well. So then we realized that the analysts will certainly benefit if we strip out the effects of government support, right? So therefore, we also did that in the earlier slide. And I may refer you to Slide 13, right, 1 3.
So if we strip out the government support delta between these 2 periods of $53 million, then the base operating performance for Commercial Aerospace EBIT is actually $25 million down. And the reason I have explained several times is that in first quarter 2020, our aerospace business is largely not impacted by COVID. Even though COVID started in January 2020, but the effects – the aircraft were in the hangar, they were already been repaired and all that. And therefore, the – for the first half of 2020, only the second quarter was impacted by COVID.
Therefore, the base is very high, compared to the first half of 2021, where the entire half is affected by COVID. So given this underlying reason, I think a $25 million drop in EBIT is not that – it’s quite understandable because the base is very high. We do – as Vincent pointed out, if you do sequential quarter, sequential half, it means first half 2021 versus second half 2020, there is…
Which we don’t have the numbers, right?
Yes. You don’t have the numbers, yes, but Vincent did mention to you.
Okay. The 7%, yes.
7% revenue, but I think the fundamentals have certainly all improved versus second half of 2020.
So we are seeing some green shoots.
Okay. So on excluding government grant type of run rate, what is the sustainable EBIT that we should be looking at? I’d probably take some time to actually digest this Slide 13. What is the run rate? Because it’s not the one that you disclosed in first half, and this year is loss. And then second half, we are expecting some improvement. But in terms of modeling, what should we be looking at?
I think a large part of the answer to your question depends on the speed of recovery of Commercial Aerospace, which in turn, depends on aviation, right? So I think it’s – if you talk to IATA or Airbus, I think they are predicting probably ’23, ’24 to become a pre-COVID level. Yes. So that’s one dimension we got to think about.
The other one is what Serh Ghee spoke about, which is we are really chipping at productivity and investing in what you call process improvements and all that. And I think in a crisis, it gives even higher impetus to do that. So we did capitalize on this mini crisis, and our people are very focused on getting our productivity up and cost down. I think those are no regret moves. And both of this, top line recovery as well as operating cost effectiveness, will help improve margins in the long term, right?
Well, in the first half of 2021, without government support, we don’t disclose the figure, we are still modestly positive in EBIT for Commercial Aerospace. But we are not at liberty to go into the details of the numbers. But I hope that gives you some perspective.
Yes. So I had two more questions, and then I’ll jump back again. And can I just check if there is any update in terms of the all-terrain vehicle bid?
Invite Ravi to give us some insight.
Siew Khee, thanks for the question. So the CATV, or the Cold Weather All-Terrain Vehicle, which is now being tested by the U.S. Army in Alaska. So if you recall, we announced that we have partnered Oshkosh. Oshkosh is a strong defense view platform, view vehicle company in the U.S. and OEM to the U.S. military. And together, we have produced 2 vehicles and actually shipped them to Alaska. And they’re being tested now, and they will continue testing all the way up to winter this year. And I think as we mentioned also that we will probably know of the outcome sometime in the middle next year. So, so far, the testing and the trials are progressing well.
Okay. And then also just on Urban Solutions. So the losses in associates, who are they? And it widened year-on-year?
Well, we – what you call early business that have bright prospects, right? If you recall, we have a joint venture with Singapore Power, and that is called SPTel. And they are actually gaining a lot of inroads in terms of fiber to the building, software-defined network and all that. So I think there are quite good customer traction. But obviously, to build up a network like that require a lot of upfront investment. So this is the gestation period, an example of how we will invest for digital business for future growth opportunities.
Yes, absolutely right. This is one example where we’re investing for future growth. We are implementing software-defined network. We are implementing multi-edge cloud solutions that will add to digital resilience in Singapore. And then, of course, SPTel’s fiber network is built on a separate infrastructure than the telco network, given resilience and supporting, I think, Singapore’s journey towards smart city and a more resilient connected infrastructure. So we are putting in investments to build further this business. And we are actually very pleased with the progress so far.
Next, we have Ajith from UOB.
A couple of questions again. First on the – you mentioned that you would be – that you’ll be receiving this year. So can we expect higher CapEx in second half compared to first half? So that’s my first question.
Second question relates to the aviation AUM. I’d like to understand in terms of the geographical focus on this, and I assume these are leased aircraft, where do you bear some of these concentrated at? For example, is it in Asia, U.S. and so forth?
Third, follow-up question to that is that in terms of the revenue within this segment, in the aviation asset management, is it just lease income? Or do you still have, for example, maintenance income that is recognized within this segment? So these are my two questions.
Let me just mention the first part. Let’s be very clear. We are reinvesting for the future. It doesn’t necessarily mean we are using the grants. We also – having money is fungible. We have also cost savings and productivity savings that we showed you. Our original target was $180 million, and we already invest part of it. So we are reinvesting for the business. Where we take the – from which bucket we take, I think that’s notional. But we’re certainly plowing back into the business to make it more resilient.
Will we see higher CapEx in the second half versus first half? No. The reinvesting for growth happens across the different category of assets. It can be capital expense, or it can be operating expense. And also sometimes when we say start a new PTF line, we also have learning curve where we may not be as efficient upfront. But over time, we’ll get better. So these are all upfront investments.
Sorry? Yes. And that will enhance our resilience and allow us to better capture growth going forward. So I hope I address your first question.
On the second question, I’ll invite either Serh Ghee or Jeff to – maybe Jeff to give some insights on the aviation leasing business.
Thank you for the question. The aviation leasing is a very global business, and our customers are also very global. In fact, we hardly have any customers in Singapore on the commercial side. So clearly, in terms of leasing, we do offer our leased assets to the global market. As of now, we are seeing interest across the U.S., across Asia and definitely in Europe as well. So it is a growing business.
From the perspective of revenue for this segment of business, we expect a mix of lease income as well as management fees income. And last year, you know we did an asset-based securitization. As a result, some of our assets have moved under asset management rather than lease income. So we expect to be able to do that. And then we will see the shift towards more asset management rather than lease income.
And we expect that the market will be responsive in terms of us working with various partners, shareholders to create portfolios that service the market. Did I fully answer your questions?
Yes, you did, Jeff. But I was just – I’m just concerned about the ABS market. Will the demand still be there given the weakened balance sheet of airlines companies and so forth?
Actually, we were pleasantly surprised that there’s a lot of liquidity in the market recently because we are going out to acquire assets. And we find that a lot of liquidity is looking for assets to buy. So it’s still a very competitive market out there.
So we believe that this market will recover. In fact, there is a lot of interest from parties, in fact, to work with us to create portfolios. So we are confident that the ABS market will continue to be resilient.
Yes, at this juncture, I’d like to make sure we articulate this and clarify this point very importantly. The government grants that we get overseas, we’ve got to make sure that we fulfill the conditions of those grants, which is to keep jobs and save jobs, so that’s important.
In addition, we are reinvesting in the businesses in those overseas markets. We are not taking the money back here. Just to be very clear, we are reinvesting in the locations where we are doing business. We are keeping jobs. We’re helping them upskill. We’re also reinvesting in the business so that when the market recovers, there will be more opportunities for the locations that we do business in overseas, okay?
Next, we have Lorraine Tan from Morningstar.
Just like quick questions on, I guess, the segmental breakdown that’s being provided. And I’m just trying to get a better sense of the margins, let’s say, for the DPS side since you’ve gone over the Commercial Aerospace side. But just a quick clarification. The government grants that are mentioned in your – in Slide – on the presentation on Slide 13, does that include grants given to the associates and joint ventures? Or is that just for the subsidiaries?
It’s just for subsidiaries, yes.
Okay. Great. In that sense, I’m just curious for DPS side, the reduction – I know there is a reduction in government grant that’s being reflected there that partially leads to the reduction in margin. But was there any other factors as well that may have sent profitability lower for that, for the DPS segment?
Yes. Lorraine, first, to remember that DPS is not 100% defense. So it also has a digital business, cyber business, commercial business, business from other government agencies other than military organizations. So some parts of DPS business is also affected by COVID. So it’s not immune to COVID as such. So in a difficult year like what we are experiencing in the first half 2021, you can expect some of this impact. Although DPS as a whole is more resilient than commercial cluster, yes.
So again, I think outlook-wise, maybe we’ll invite Ravi to talk a little bit more. But in terms of the business aspects of each sector, as Vincent pointed out, we are gaining quite a good traction. For example, Marine, we have won the T-AGS 67; Land System, we are producing the Hunter vehicles and the production is going on very well. So perhaps we can have Ravi add to that.
Hold on. Let me just also just build on what Cedric mentioned. So some of our – parts of our businesses in DPS, like, for example, Marine business, last year, we had a lot of, I think, pretty pronounced impact from migrant workers restrictions. It’s gotten better, but we are still not totally out of the woods. We are continuing to have to take measures to mitigate those impact.
So Lorraine, thanks for that question. So maybe just to add on to Vincent and Cedric, just take a few minutes to just cover the businesses. So you’re familiar with Digital Systems and Cyber business. So I mentioned also previously, our Cyber business has got more opportunities. We delivered more this half and actually they also won more orders. Similarly, for our Digital Systems business, as we go into cloud, data analytics, we were able – they were able to build up the business.
And with COVID, as we also mentioned previously, there’s a shift and more demand for digital solutions. And we are building capabilities, especially in cloud and data, I think, to take up those opportunities. For Land System, the Hunter production is at full steam now. So that’s one of the reasons why, together with what Serh Ghee mentioned, keeping our costs and – high, and our productivity high. Land System is doing a lot of production in Singapore now as well as looking and continue to look for opportunities in ammunition and small arms in Singapore and around the world. So the business continues. And you can see from the revenue growth for Digital Systems and Land Systems, they continue to grow.
Similarly, for defense aerospace, where the MRO business is a very long term, much more steady business. And we are delivering a continued focus on good delivery so that the work that we are doing deliver efficiently and also safely. And the Marine business, also, as mentioned by Vincent, also has our U.S. businesses as well as commercial business, our defense business. And that continues to also be affected by the challenges of foreign workers in Singapore.
So overall, I would say that if you look at the revenue growth and also the EBIT growth of the business, taking away government support, I think is, as Vincent mentioned, quite more robust and more stable. But we are also affected by the overall trend in terms of government spending as well as defense spending in Singapore and around the world. So I think that’s something that we have to look at. While we’re not immediately impacted by COVID, but I think over time, that’s something that we have to monitor very closely.
And I think all the business areas are looking – working very hard on the cost control as well as growth and building new capabilities. And so we continue that and the opportunities are there, then I think the business will continue to look for opportunities and grow.
So we have Jame Osman from Citi.
Just three quick questions from me. My first question is on the PTF business. Given its significance to Commercial Aerospace and also how quickly it is ramping up, maybe would you be able to give some color on how that performed in the first half of 2021, maybe both on a year-on-year basis and also as a percentage contribution to Commercial Aerospace. That would be helpful.
My second question is on hangar capacity utilization. I think you mentioned it’s somewhere around 2/3 overall and 80% for airframe. Is that the current trend we’re seeing going to July, August? And then maybe could you also share what it was overall for the first half of 2021?
And my last question is just a small question on the new disclosure for EBIT. Could I just clarify which line items were previously below the reportable segment EBIT line and which of those items have now moved up into calculating EBIT?
Okay, Jame. I’ll let Cedric answer your third question. But just to be clear, on the aerospace capacity utilization, the airframe side is more than 80%. Overall, more than 2/3. That includes component and engines on average. So just to make that point clear. And I’ll invite Jeff later on to address your first 2 questions. Cedric, please?
Yes. So basically, on the third question, EBIT is strictly earnings before interest and tax. So all the other items, all the way from revenue, cost of sales, depreciation, operating costs, they are all – even associates and other income are all accounted for before we arrive at EBIT. So after EBIT, you just less interest and tax and you have your net profit and NCI in it.
Does that include the – I think there’s some investment income as well? Was that also included as part of interest income or…
Yes, those are all taken into account. So after EBIT, it’s just interest and tax. That’s all.
Okay. Thank you for your interest in PTF. It’s a very exciting area for us because the momentum continues to build. At the end of last year, we had 5 production lines. At the end of this year, we will have 8 production lines. At the end of next year, we will have 12 production lines. So we are increasing the throughput of conversions by more than double. In fact, 2.5x in the next 24 months, okay?
So it’s – we see increased interest in terms of bookings for the slots. And obviously, there’s a lot of ramp-up work we have to do. So in terms of contribution to commercial aerospace, it will continue to grow significantly from the top line perspective. From a bottom line perspective, Cedric has also mentioned earlier that there needs to be investments. We need to bring the tooling in place, the training, the material and all the support work across the whole global network to make it happen. So I would say in the short term, we will see investments in this area rather than a whole lot of EBIT contribution, okay?
So in terms of capacity utilization. We are very thankful that because of PTF conversion, we are able to use some of the freed up capacity in airframe maintenance, for example, the hangar’s capacity. So we are seeing, in fact, well above 80% utilization and a part of which is contributed by PTF conversion.
So in fact, without PTF conversion, we would actually see a lower hangar utilization. So from a perspective of the diversification of our business, we clearly have the geography, the product as well as the customer base that allows us to be well diversified across the whole business. Hope that answers your question.
Next, we have Zhiwei from Macquarie waiting on the line.
I have three questions. The first question relates to the one-off gain from liquidation of some subsidiaries in the defense in the DPS segment. Could I just understand what those subsidiaries were and how they came about?
The second question relates to your defense revenue on Slide 8. This is a very nice gradual increase of about $200 million every first half. Trying to understand what was driving this revenue uptick in relation to your DPS segment. Which subsegment was actually driving it? And should this – how should we expect this revenue trend to evolve going forward?
And the third question kind of relates to how you now have additional savings that you could reinvest into the business. Would you be able to share what sort of returns you had in mind, at least if you were to reinvest these monies into your business?
I’ll let Cedric answer the first question on the one-off gain. And then for defense revenue, and I’ll let Ravi mention. But on Page 29 of your presentation, you do see the revenue of the subsegments, so you’ll get some insights. And likewise, for the other main segments, you’ll see the subsegment revenues there in the appendix of our presentation deck. And then – and I’ll also let Cedric address the third question on the returns on additional savings.
Thanks for the question, Zhiwei. The first one is liquidation proceeds from a special vehicle – specialty vehicle company in China. So the liquidator managed to sell the assets in excess of its company’s obligation. So we were a shareholder and therefore, we recognize a gain.
I might just take the third question first. When we invest, we do so in a very disciplined way. There is, of course, an investment committee for R&D. There is also investment at various management levels to oversee, discuss robustly the assumptions underlying each investment.
But ultimately, I think, first, it must fit our strategy. We won’t invest in pharmaceutical products, for example. Secondly, it must fit our capabilities. We must have a role to play, a right to play in that area. And fundamentally, thirdly, it must meet some IRR hurdle, right? And obviously, the IRR hurdle will depend on the risk and the familiarity or lack of in that particular space that we are participating in or whether it is a start-up and they have certain other kinds of risks. So we take all those into account. I would say the process is very robust.
So Zhiwei, thanks for the question. So the chart on – the chart – the numbers there show our purely what we call the defense revenue. So this includes revenue from defense sales in Singapore, defense sales out of Singapore to international customers, as well as defense sales of our U.S. company – U.S. companies, which include Mark Miltope [ph], iDirect as well as VT Halter Marine. So when we look at these numbers, they actually reflect the group’s defense sales across all our businesses.
And I think we have been seeing a steady increase because across the board, we are making concerted effort both locally, international defense as well as our overseas subsidiaries that are selling into defense. And I think over the last couple of years, we’ve managed to make good inroads.
And I think we, of course, would like to do more of this, and we are working very hard to grow the defense business out of Singapore as well as our overseas subsidiaries. And we are looking for more opportunities, something that we are working on. And some of this, of course, as you will understand, defense business is a very long cycle. As we spoke earlier about the CATV program, from inception to actually opportunity to participate in a trial. And then if we win final delivery, it will take a couple of years. But this is an area that we are very focused on, and we have quite a number of businesses that have the opportunity to grow our defense business.
For the question – and I think you already appreciates it, but I’m quite clear, I think you already do. Because that – on Slide 8, right, the defense business is only a subset of the Defence & Public Security business, which also includes some commercial element. So that’s, I think, the math. Within the Defence & Public Security, of course, our subsegments are disclosed by revenue and in the appendix slide. Yes. But I think you appreciate that. Thank you.
Now circling back to Rachael Tan from UBS.
Okay. So okay, I mean, maybe just break from all the tough questions. What is the – what are the two things in front of your – that is in front of you? Are they water bottles?
Yes. Yes. Just to make sure you know what it is. It’s – yes, yes, it’s indeed water bottles. We’ve gone on to use reusable utensils instead of paper cups. So for the environment.
Rachael, we washed it also.
Yes. Nice. Okay. Yes, sorry, because all the questions are a bit serious so I thought maybe just like, what are those three things there. So maybe in terms of like of the $100 million in government grants. I know you can’t give – you said that it won’t be a 100% increase in net profit. You will take some and invest it. So maybe just to like help us to understand. Are we – would we be looking at a ballpark area of pre-COVID level kind of net profit after your investments? Or would it be not as high as well?
Yes, it’s – we can’t give any indication at this time. We disclosed to you as much as we could at this time. We’ve got to watch the space. But of course, we, as I mentioned, we welcome and we appreciate the support that we have gotten from the other – the governments in the locations that we have business operations in.
But let me just clarify one more time. We shouldn’t be thinking of, okay, from this $100 million that we’re reinvesting because money is fungible. As far as the government grants and support that we receive, there are conditions tied to them. We have to make sure that we maintain jobs and keep jobs. And then we also do reinvestment in those facilities overseas so that we can capitalize on the upturn when it comes. So the reinvestment also happened in that front. And some of them may include PTF line setup, new line setup in certain aerospace facilities that we were not doing PTF in the past. But now we are setting up PTFs in the U.S., in some other geographies as well to expand the number of lines to take on the induction numbers that we talk about just now.
I think it’s important to do – to make that distinction. I think suffice to say that because of the need to capture opportunities presented by the recovery, we have to now, at this time, put in investments so that we are prepared for the upturn when it so manifests itself. We are not able to tell you exactly what the number would be because it is still dynamic, and the situation is still unfolding. Yes. And yes, Jeff, please go ahead.
Yes. Rachael, fundamentally, I wanted to add that it is totally inappropriate to think that the government would give us money and then have it translate into profits. The whole reason that we receive these additional grants, even on the last minute, is that because the business didn’t recover as quickly as it should have. And the reason is that the COVID crisis has actually prolonged beyond all expectations, including the Delta variant. So certainly, this amount of money that we receive very gratefully from governments are totally intended to support the business during a crisis, especially where we are supposed would be holding on to jobs, keeping the skills to ensure that when the market recovers, we are able to actually respond to the market.
So actually, again, I want to say that we receive these grants for a purpose of supporting the business. And certainly, they are not intended to be – to help us make more profits. And really, when we look at the market conditions, that it certainly called for the government support, and we appreciate that. Thank you.
And of course, we also mentioned that on our part, we are doing a lot of cost saving, productivity improvements to help ourselves, this self-help. And this is not something that the external environment gives us, but we do it on our own in a way that’s sustainable, that will still allow us to benefit when the upturn comes. But we keep ourselves efficient and productive in the meantime.
So there’s also this element that is actually a big wedge, the $180 million that we say is on track. But we’re also reinvesting part of it into the – back to the business to better prepare ourselves to capture growth. Yes. Rachael, I hope that answers your question.
Yes. No, it definitely does. I hope you appreciate that, like analysts is also like kind of a…
We appreciate your question. So yes. But I do like your question about the 2 things in front of us. I thought that was quite nice.
Okay. So next question will be actually on M&A side. So I mean there was obviously the Cubic thing that you were looking at, which would have been very compatible with your business. So are there any other parts of your business where you feel that capabilities and customer base could be better served by M&A opportunities?
First of all, our M&A efforts or where we look at M&A, it has to be in alignment with our strategy, our growth strategy, which you are quite familiar with. So we scan the horizon for those opportunities at all times. Well, I mean, consistently. So yes, we are looking at areas where – are strategic to us, in alignment of our strategy and is not just limited to urban solutions or urban mobility. So we look across the various business verticals, Rachael, if I answer your question. And obviously, M&A is also opportunistic. It depends on time and space. But when the right opportunities present themselves, given our strong balance sheet, we are in a position to capture those opportunities.
But remember, we’re doing this because we want to grow sustainability – sustainably in accordance with our strategy. So we go back to our growth strategy, and then we look at targets that fit with our growth objectives.
Okay. My next question is on your order book. I noticed that there’s a – there are – it’s quite obvious that there are some contracts – some sizable contract wins that you are not allowed or not allowed to disclose. Is it possible to share as much color as you are legally permitted to on what they are?
Okay. I’ll share with you that the order book for the 3 segments all went up during the same period. So that, I can tell you. So it’s not just focus or concentrated in one or two segments, but all three segments experienced an increase in order book.
Does that [indiscernible], Rachael? I hope it does. But I mean that’s the extent that we are able to disclose at this time. Yes. So order book, I mean when I say all segments that includes Commercial Aerospace as well. So we also saw an uptick in order book for our Commercial Aerospace business. That, again, speaks to the recovery that we talked about in the first half of this year versus the same period last year as well as versus second half of last year.
So we have time for one last question. We are circling back to Siew Khee from CIMB.
Can I ask three questions, please?
Okay. Just to follow up on your earlier elaboration on the SPTel JV. Did you say that you’re building a second fiber network? How is this different from the one that NetLink is doing? And how long is the gestation period?
Okay. So SPTel already has a network of optical fibers across Singapore. But that’s true, the power line rather than the telco line. We continue to build this network to access certain buildings that we think are accretive to the business. So commercial buildings or critical infrastructures. We’re also building a software-defined network over the fiber – optical fibers to provide more digital services. We are also building our edge cloud to provide compute as a service. So for companies that has computing requirements, we are helping them reduce their upfront capital cost by leveraging on our edge cloud, which then allows them to do their computing closer to the actual application and without necessarily having to pipe back all the full cache of data back to their data center. So this is – these are the services that we are providing. So we are investing to build that.
I hope that clarifies. So there’s a fiber network part where we are building to – that we are connecting to building, select buildings of our target. But there’s also the software-defined network and the digital services that come with it as well as the edge cloud that we are building to better support our customers.
And the gestation period?
Siew Khee, I hope I answered the question.
Yes, yes. It’s for enterprises.
Also, I think in – well, I think it’s going to take a couple of years for us to build. And we have been getting good traction with customers. So this will take a couple of years to build.
Okay. So the other two questions. So one is just going back to margin, okay? The defense and public, now you had actually combined a lot more divisions in this. And if I were to just look at this, I haven’t really actually had time to actually look at the ex grant, et cetera. But just reported wise, it’s actually lower. Other than grant, is there anything that we should actually be aware, worried of?
Siew Khee, like we said, DPS is a big construct. It’s a big cluster. It has defense. It also has a certain commercial work. So in first half ’21, the commercial part of it is affected also by COVID. But of course, if you compare the DPS cluster with the other segments, it is more resilient to business cycles. Whether we do, the margins will improve over time. This is always something we seek to do, and it depends on the opportunities. And of course, a lot depends on self-help, which is really productivity and cost efficiency. I think Serh Ghee did good piece of work at Land System in terms of designing for efficiency. So maybe that’s something we can talk about.
Yes, Siew Khee. Any other – you have 3 questions, right?
No. Yes, I got that. Okay. I understand that. Okay. And my final question is just on order win overall. It’s actually compared to – I mean, from the new segments that you actually disclosed, Commercial Aerospace did do – actually secured more contract this quarter. And then just wanted to hear from management whether there’s anything interesting out there. Because I saw that this quarter, you have the panel, and I just want to see whether there’s any new trend that we should be excited over and whether this is – I know you can’t guide in terms of what is the future contract, but this step-up, is this sustainable? Or it’s just because a client decided to clinch – to close a contract this quarter, hence, there’s a bump up? Or is there like a positive trend that we should actually learn from this quarter?
I think as we mentioned, right, the recovery is gradual. I mean, first half of 2021, we did see also higher revenue versus second half of 2020 for aerospace. We disclosed that as 7%. So as the industry recovers, we obviously hope that more contracts will come. I don’t know whether Jeff has any more perspectives to share.
But then again, the COVID-19 situation is evolving, still quite dynamic. We hope – we are still hoping that this will get better sooner rather than later. But we have been building our fundamentals, strengthening it so that when the recovery continues to strengthen, we will be there to benefit from the investments that we have made and the strengthening that we have done. Okay, Siew Khee?
Yes. Well, I want to go back to this – your first question about SPTel joint venture. I want to say that because we – I don’t think we have said it in any material form in the past. We will take a couple more years to substantially build the network. But this is an interesting and exciting space because this kind of network will complement the whole connectivity infrastructure in Singapore and allow us to provide more services in this whole journey towards a more digital, digitally connected nation, our journey towards Smart Nation. So we are pleased to be able to contribute to that journey.
So over time, you’ll probably hear more on this front but we are quite heartened by the opportunity that this presents to us and also to our customers in the ecosystem.
Okay. It seems like there’s no further questions. I want to take this opportunity to thank all of you for participating in today’s call. I know it’s a virtual format. We hope that we can resume in-person meetings the next time we have our results update. But till then, we thank you once again for joining us, and we wish you a very pleasant rest of the day. Thank you. (Source: Google/https://seekingalpha.com/)