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ST Engineering; Resilient Business At A Discount?
Corporate Digest | 28 August 2015
Related stocks:
S63
By: Tan Jia Hui
Articles (82) Profile

Singapore Technologies Engineering (STEng) – a firm that specialises in aerospace, electronics, land system and marine capabilities for defence and commercial usage – is a local enterprise that should not be unfamiliar to Singaporeans.

The firms’ stock has lost more than 25 percent from its peak in April and we are beginning to see value emerging for investors.

Defensive Business

Ploughing through past years’ performance, the group can be classified as a rather defensive play.

The company’s results were rather stable, even at the height of the global financial crisis in 2008. Top and bottom lines have been growing yearly between FY09 and FY13.

Though turnover and earnings fell in FY14 on the back of weaker performance in Europe as well as the ongoing restructuring of certain operations, investors should not be overly concerned.

Source: Company Annual Reports

As previously mentioned, STEng serves customers from both the defence and commercial segment.

In FY14, 39 percent (FY13: 38 percent) of revenue was attributable to defence customers. The fact that a large chunk of its sales comes from the defense segment adds on to the resilience of the company’s business.

Even during an economic downturn, defence spending is expected to remain relatively stable and be less negatively impacted, as it serves a strategic purpose for nations.

Apart from defence contracts, the group also wins contracts from government agencies, in particular in its electronics segment, where it is a leading information communications technologies system provider in the region. The segment is poised to benefit from the projected increase in infrastructure spending within Asia.

As of 30 June, STEng has an order book of $12.4 billion and has managed to secure approximately $1.3 billion worth of new orders in 2Q15, providing earnings visibility.

Robust Free Cash Flow And Balance Sheet

Cash flows should be an important aspect that investors look at when examining businesses, instead of being fixated on earnings alone.

Taking a more conservative approach, I tend to favor businesses which can generate consistent positive free cash flow.

In this aspect, STEng fulfills the criteria, recording positive free cash flow in the past 10 years, which should give investors more faith in the continuity of the business.

Besides a healthy cash flow record, the group has also maintained a solid balance sheet, with a net cash (cash and equivalents minus total debt) position of $51.3 million as of 30 June.

The company has also been consistently rewarding shareholders with a stable dividend payout in at least the past 10 years. In the recent five years (FY10 to FY14), normal dividend ranged between $0.07 to $0.08 per share in each year, while a special dividend between $0.0755 and $0.098 was given out each year as well.

Valuations

Current share price weakness is making STEng shares look attractive based on historical valuations.

Based on a share price of $2.80 (24 August close), STEng’s trailing 12-month price to earnings ratio (P/E) stands at 16.9 times, lower than the 5-year average P/E of 19.8 times.

The valuation also sits closer to the lower end of the range for the stock’s 5-year historical P/E data that is between 15.5 and 24.4 times.

Source: Company

While nervous investors might be waiting on the sideline to see if the stock market trends even lower, given the defensive business and consistent dividend history of STEng, it is certainly a stock that should be on your watchlist.

Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.

Please click here for more information about this author.

Singapore Technologies Engineering  3.920 -0.06 -1.51%   
Business: An integrated engineering group providing solutions & services across many sectors. [FY18 Turnover] Aerospace (39.5%), electronics (32%), land systems (19.1%), marine (8.6%), others (0.8%).

Insight: May-19, 1Q19 revenue rose 5.1% to $1.7b attributed... Read More


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