Singapore Technologies Engineering Ltd (Time to buy?)

In one of my previous posts, I did a study on the historical dividend growth and dividend payout ratios of the various high dividend yield stocks listed in SGX (read here).

One of the stocks which has stable dividend yield (not really upward trending though), down trending payout ratio and low payout ratio is Singapore Technologies Engineering Ltd.

Its Trailing Annual Dividend Yield as shown in Yahoo Finance is 3.20%. Its total dividend for 2015 is S$0.15 per share. So at its current stock price of S$3.08, the dividend yield is 4.87%. The yield is not sky high but respectable nonetheless.

The company has its fingers in many pies, thus making it a conglomerate. It operates through four segments: Aerospace, Electronics, Land Systems, and Marine.

Among these segments, Aerospace contributes the most revenue and profits (33 % & 43%) followed by Electronics (27% & 31%).

Its latest earnings report does not show good results (eg. lower profits):

Profit attributable to shareholders receded to $110 million, down 15% year–on-year.
Earnings per share (EPS) also fell 15% as a result, slipping from 4.17 cents in the first-quarter of 2015 to 3.53 cents in the latest quarter.
The free cash flow is $65.9 million for the reporting quarter. This is a step back from a year ago, when ST Engineering had $256.2 million in free cash flow.

The main culprit for the poor results is the Marine and Land Systems business segments which suffered revenue declines. The former saw sales fall by 24% to $213 million. For the latter, its revenue was $284 million for the reporting quarter, down 18% year-on-year.

Singapore Technologies Engineering Ltd’s Latest Earnings: Higher Sales, But Lower Profits (read here)

Let’s take a quick look at its key financial statistics in Yahoo Finance (see below):

The good points:

The management effectiveness of Singapore Technologies Engineering Ltd, esp. for ROE, is relatively high at 21.18%.
Balance sheet is ok, with a high total cash level of SGD 1.2B (which is more than the debt level of SGD 1.18B).

The bad points:

Profitability is low. Profit margin and Operating margin are only at 7.90% and 7.77%.
Current Ratio is 1.31 (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).
A search in POEMS show that the 5 years EPS growth rate is only 1.10%.
Valuation wise, it appears that Singapore Technologies Engineering Ltd is over-valued. A search in POEMS, shows that the P/E is 18.08 – not its highest but still relatively high. It is that’s 74.4% of the peak P/E which is much higher than Graham’s preference for 40% or less. (ST Engineering’s highest PE ratio over the last five years is 24.3 and it was seen on April 2013). The EV/EBITDA (as shown above) is 13.63 (As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value). The price to book value is also high at 4.39.

Let’s look at the historical financial ratios of this company.

Free cash flow has been downward trending in recent years.

ROA, ROE and ROIC are also downward trending over the years.

Not good.

Let’s do a quick study on the trailing PEG and intrinsic value of Singapore Technologies Engineering Ltd.

1) Trailing PEG

P/E: 18.08
Dividend Yield (%):4.87
EPS compound growth rate (5 yrs): 1.10%

The trailing PEG will be 18.08/(4.87+1.1) = 3.03. Which is not good (> 1).

2) Intrinsic Value

First let’s look at the estimated 5 years earning growth. We are going to use a time-frame of 5 years from now for this purpose. Given EPS and a PE ratio, stock price can easily be calculated for any company. Using the below formula.

F = P(1+R)^N where:

F = the future EPS
P = the starting (present) EPS (0.17)
R = compound growth rate (1.10%. However let’s take a 20% discount, and use 0.88% as I am not really sure if growth can be maintained.)
N = number of years in the future (5)

Estimated future EPS: 0.18

I will be estimating the future PE of Singapore Technologies Engineering Ltd to be 21.9 (See below data from Morningstar). Strangely I am unable to get the average of the PEs from 2006 to 2015 – as the P/E value for many years are not indicated.

Future Stock Price

P=EPSxPE

P = future stock price
EPS = future EPS
PE = future PE

Hence future stock price of Singapore Technologies Engineering Ltd is 0.18 x 21.9 = 3.942

Intrinsic Value

P=F/(1+R)N

P = present (intrinsic) value
F = future stock price (3.942)
R = MARR (15% or 0.15)
N = Number of years (5)

Hence, the intrinsic value of Singapore Technologies Engineering Ltd is SGD 1.96.

Stock price of Singapore Technologies Engineering Ltd now (15 May 2016) is SGD 3.08. Hence, there is no margin of safety.

“A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss.” Seth Klarman

In summary:

Singapore Technologies Engineering Ltd is one of the better dividend stocks and has a number of merits eg. respectable ROE and balance sheet.

However, it is not a small, fast growing company. With a market capitalization of SGD 9.57B, its profitability has been down-trending over the year. Indeed, its immediate future outlook is not promising. Against a weakening global economic environment, the Group intends to adopt a cautious approach to its businesses.

The high price to book ratio, EV/EBITA seems to suggest that the stock is overvalued. Likewise, the trailing PEG and the estimated intrinsic value (which is higher than the stock price) seems to suggest that as well.

As of now, I will just be observing this stock.