ST Engineering is an (what else) engineering company that has dealings in Aerospace technology, Electronics, Land Systems and Marine. It is an STI component stock and considered a blue chip, defensive stock. Let's look at it's fundamentals.
Please note that my FA is not as detailed as other bloggers. Also, my opinions do not constitute financial advice.
1.) History of Consistently increasing sales, earnings and cash flow
SALES: ST Engg's sales have consistently increased from 2003 to present, with 2 exceptions in 3Q09 (-2% YOY) and 2Q04 ( -5%). Mid 2000s saw it's revenue increase at an impressive rate, with certain quarters hitting 20+%, but we all know that that's unsustainable. Sales Growth has tapered off to roughly 5% YOY the past 3 years. It has to be noted that ST Engg's revenue didn't decrease during the market crash in 2007-2008. I will touch more on that later. COGS (cost of general sales) increases roughly in line with the percentage increase with sales, so marginal cost is still less, or roughly at, marginal revenue. (A level econs: MC<=MR) This is good because as sales increase, marginal costs tend to be higher (i.e. more inefficient), however, ST Engg's management has found ways to improve productivity or lower unit cost.
Profit: Earnings took a hit during 2008 and 2009, with earnings less in 2009 than 2008 (hmm...) . However 2003-2007 saw earnings increase steadily at about a 5-7% clip.
Cash Flow: Cash flow has decreased this year. In 2009, ST Engineering's Cash flow was increasing, however, for the 9M 2010, it has decreased. Not a very good sign.
2.) Good competitive advantage
Competitive Advantage:
-HUGE economies of scale. I'm sure the unit cost of producing 100,000 SAR 21 or 100 FH 2000 is lower than if you produced 1 SAR 21 and 1 FH 2000.
-Monopoly. Since ST Engg is govt. linked, many of ah gong's contracts go to ST Engg.
-High Barriers to Entry. Defense is an extremely capital intensive field, as can be seen by HUGE outlays in purchase of PPE every year by ST Engg.Not only is ST engg capital intensive (it sure is capital intensive if you've to build FH 2000's and SAR 21's, inter alia), it also has some intellectual property. e.g. SAR 21 is patented.
-Brand name. ST Engg has a reputation as a efficient and reliable defense contractor. It has garnered many defense contracts from the Royal Air Force, British Army, US army etc
-Expertise in it's field. ST engg was set up as Chartered Industries of Singapore and it has grown from strength to strength since its inception in 1967.
3.) Future growth drivers
-The sun never sets for the defense industry.
-Looming tensions in North Asia, SEA as a growth driver...
-Ah Gong is always on the lookout to improve the 3G SAF's capabilities...
-Biggest customer is SAF, SAF's per annum budget is 11 billion, SAF likes to purchase new things...
-Outsourcing of alot of things to ST from SAF...offhand I can remember...Maintenance of live ranges to ST, Army logistics to ST Synthesis, auditing to ST Synthesis, maintenance of munitions...etc etc
In conclusion...future growth drivers able to sustain ST's modest growth rate.
5.) ROE above average
ROE is 23.0% according to 3Q financial Statement. Very high, means they're getting a good return on shareholder's money...
Return on Sales is at 9.4%...Not exactly very high but comparable to high capex industries...
Capex required is very high to sustain current earnings...After all this is a very capital intensive industry
6.) Senior management staff are holding, buying the stock
Ah Gong owns 52%. 'Nuff said.
7.) Debt Level
Debt Level for ST Engineering is very high. Amount repayable within 1 year is SGD 341,802,000 and long term debt is SGD 989,441,000. eye popping right? considering earnings for the 9 months in 2010 were only SGD 356,766,000. But high debt level may indicate that ST engineering is leveraging on low interest rates to expand it's operation...Just like how your housing loan payment per month is 5k but you manage to let out that house for 4.5k per month...and after 10 years you get a "free" house... paying only $500 a month...
Anyway high debt level is to be expected for a capital intensive company like ST engg.
When to Buy:
1.) Undervalued
Px less than intrinsic value
I will not be calculating the intrinsic value for this stock. It's Cash flow has varied too much the past few years for me to sketch an accurate picture.
P/NAV: 6.79 (!)
NAV: $0.4976
PE Ratio: 23 (!)
PEG: 23/5= 4.6 (!)
Needless to say, way too expensive at current prices.
2.) Stock price in consolidation phase/ uptrend
Uptrend
My conclusion:
Company with solid fundamentals, backed by ah gong, huge economic moat, thriving industry, moderate dividend yield(~4.0%).
Consider placing this defensive stock in portfolio; Profit/Earnings/Cash flow does not decrease much during bad economic times, but on the flipside do not increase much during good economic times either.
However at current price is somewhat expensive, so wait for a pullback before entering, if interested.
Disclaimer: I'm vested in this stock.
I'm vested in this as well at $2.28
ReplyDeleteBeing in the SAF, one can see how the amount SAF spends on ST products, i.e. SAR21 and the maintenance.
To me, this is an ultra defensive counter with good dividend yield at my purchase price ")
Yup. I agree, government is inherently inefficient (but I have to remark here that the SG govt is alot less inefficient than others) due to lack of profit motive, and hence businesses dealing with government gain. So let's gain with them! :)
ReplyDelete(though not at current prices)