An in-depth view on ST Engineering-is it a stock worth buying?
Quick answer, no.
But it is a solid dividend yield blue chip index counter, cried the supporters! Well, that doesn’t account for anything. If you are investing in anything whereby you are given “high” dividend but your capital/principal is falling, then you are essentially being paid your dividends using your capital. In other words, the dividends are actually your own money. So lo and behold, whatever “attractive” dividend yield suddenly doesn’t seem that great anymore.
Besides, is ST Engineering that great a dividend stock? Well, truth is, it isn’t. A really good dividend stock is one that is able to grow its dividends. It paid 15 cents a share in 2014, which is lesser than 2013 when it paid 16 cents. In 2015, the board has announced that dividends will be unchanged at 15 cents. That's good news isn’t it, since dividend is unchanged. Wrong! Because of inflation, you have actually received lesser dividend in 2015. To make thing worse, if you had held the stock from 2014 to 2015, you would had suffer capital losses as well.
And here’s the scary thing-it is giving 15 cents per share dividend while it is only earning 17 cents per share. Now, if you are only retaining 2 cents per share for your own company’s usage…how is that realistic? It represents two things. One, the company could be digging its hands into the coffers to sustain the dividends. Two, the company has next to no interest in growing the company. Which we saw, since the last quarter reported fall in quarterly revenue of 2.6% year-on-year, leading to a fall in earnings year-on-year. Think for a moment. If this is the case, how can then, the company continue to sustain the “high dividend”? The business is shrinking and yet you have little capital to grow it, while at the same time, you need to give out high dividends. The shortfall has to be taken from somewhere. To complicate matters, two of ST Engineering’s main businesses (aerospace and marine) are in poor industrial conditions for the year and likely the next as well.
Blue chip index counters are not infallible. I could quote Noble, but people would cry unfair as it was hit by fraud. Let’s then take a look at Genting. It has fallen from highs of $1.30 to current levels of 90 cents. Nobody reckon that Olam could face a crisis as huge, to the extent that it had to be white knighted out of the situation. A possible counter that can be used for comparison would be Sembcorp Industries. Like ST Engineering, it doesn’t just focus on one business. Like ST Engineering, it has one of its core business hit by oil. Sembcorp Industries has sunk from $5.44 in 2013 to the current levels of $3.80. ST Engineering itself, was sitting at $3.76 on 11 July 2014. Today, it sits at $3.31, representing a 11.96% fall in value.
But ST Engineering has won so many contracts! It is supported by SAF! It can only go up! Well, news flash. It has been consistently winning contracts. But yet we have seen the share price slide down over the years. Also, just because it provides for the SAF doesn’t mean it will definitely be going up up and away. It is a fact that SAF is shifting towards a more technology-based defence, but think about it-at the end of the day, Singapore doesn’t run a professional army. The defence budget increases on an annual basis, but at one point, it has to slow down. A nation like Singapore would rather focus additional government budget it has towards developing its main allure as an economic hub, not pumping the defence by ridiculous amounts year after year. The tie-in with SAF guarantees revenue, but this revenue is not sufficient to propel ST Engineering to greater heights.
So where is ST Engineering headed? Well, the direction is definitely down. How far down? Well, this is very tricky. First of all, let’s take a look at some numbers. If dividend yield is promised to be at $0.15 per share, it represents a 4.5% dividend yield at current price. Unfortunately, this is not sustainable, for reasons mentioned throughout this article. The only saving grace is that ST Engineering is sitting on a pile of cash, $1.68 billion in fact. But hold on, it is also faced with $1.08 billion of debts. The nett cash position is still $600 million, healthy, but would it be sufficient? For a company dealing in aerospace, marine and also defence technology, $600 million is a nice pile to sit on, but considering that the net EPS is $0.02, it leaves the company on a pretty thin buffer. Also to note is that one year ago, ST Engineering was sitting on $700 million.
The next we have to take a look at PE. ST Engineering currently trades at over 19.5x PE. For a company that has little growth potential, the PE is a tad too high. A more acceptable PE would probably be 15-17x. However, it is also a little difficult to price ST Engineering too low, because then the dividend yield would essentially run up too high, making it an attractive yield counter. Investors come in, the price is thus pushed up again. As such, I see ST Engineering being downgraded to 18-18.5x PE (just a little lesser than now). It should see the price of $3.06 to $3.15. The 52 week low this counter has seen is $3.14, so this pricing is not entirely far-fetched. Remember, if EPS falls, then this new price would actually then reflect a higher PE again.
Impossible! It is un-imaginable for ST Engineering to sink so low! Well, times change. The world is constantly changing. Let’s take a look at some case studies, shall we? We can re-visit Genting. Like ST Engineering, it was thought to be a defensive, all-weather and exclusive stock. In Jan 2014, it was trading at $1.50. Fast forward to today, it trades at under 90 cents, representing a 40% plunge in about 1.5 years. Sembcorp Industries? In Jan 2014, it was trading at $5.25 and today, it trades at $3.84, a 27% fall in about 1.5 years. ST Engineering has the same trend; trading at $3.92 in Jan 2014, currently at $3.31, representing at 15.5% fall in about 1.5 years.
But hold your horses. ST Eng’s decline requires a catalyst. It is currently trading in the range of $3.20 to $3.35, ie range-bound. The $3.20 support is a strong one; likewise, the $3.47 resistance is also a strong one. The slip in the stock price would come when the next quarter results are announced. Any announcement that is less than strongly positive should trigger the downtrend again. Results are likely to be muted with marine and aerospace likely to continue to be a drag. The recent aerospace won has no impact on financial numbers for this year, as announced by ST Engineering itself. We should see the $3.20 level being broken as the stock price slide towards the range of $3.06 to $3.15.
In the event the next quarter results somehow turn out to be fantastic, expect some cheer and the price to move north. Nonetheless, this would be short-lived and the price should slide back to the range of $3.20 to $3.35 before the next quarter announcement again.