ST Engineering - OCBC Research 2015-10-06: Upgrade to BUY – value emerging

ST Engineering - OCBC Research 2015-10-06: Upgrade to BUY – value emerging SINGAPORE TECH ENGINEERING LTD ST Engineering S63.SI 

ST Engineering: Upgrade to BUY – value emerging 

 Now 1 SD below average P/E 
 2H to be better than 1H 
 5% dividend yield 

13% tumble after 2Q15 results 

  • Singapore Technologies Engineering’s (STE) share price tumbled 13% after posting its 2Q15 results on 14 Aug 2015 to hit a 52-week low of S$2.70 on 25 Aug 2015, despite its results being within our expectations. 
  • Instead, we believe the fall was sparked by the general market sell-off (the STI fell 7.3% over the same period) as well as rising interest rate concerns; this was not surprising given that many view STE as a defensive yield play. 

Valuations are less demanding 

  • Although STE’s share price has since recovered somewhat to around S$3.00, we believe that valuations around current levels are looking more interesting and less demanding. Management appears to think so too - it has been actively buying back its own shares since 19 Jun. 
  • To date (1 Sep), it has accumulated around 8.75m shares at an average price of S$3.00 by our estimate; this making up for about 14% of the 62.19m shares it can buy back under the share repurchase mandate. 

Outlook still modestly upbeat 

  • Although 1H15 numbers were slightly weaker than the street’s estimates, STE has guided for a HoH improvement in both revenue and PBT for 2H15, such that it still expects revenue and PBT to be comparable to FY14. This is not surprising given its current order book of S$12.4b (as of end Jun), of which it expects to deliver about S$2.3b in the remaining months of 2015. 

CEO-designate to take over in a year’s time 

  • Separately, STE recently announced that President and CEO Tan Pheng Hock will be retiring in about a year’s time and his position will be taken over by CEO-Designate Vincent Chong. We do not see any leadership disruption as Mr Tan will be working closely with Mr Chong to ensure a smooth leadership transition. 

Upgrade to BUY with unchanged S$3.33 fair value 

  • In view of the recent correction as well as the sharp dip in the 10-year bond yields, we feel that value is emerging for STE; hence we upgrade our call from Hold to BUY with an unchanged S$3.33 fair value (still pegged at 19x blended FY15/FY16F EPS), also supported by a 5% dividend yield. 

Carey Wong OCBC Securities | http://www.ocbcresearch.com/ 2015-10-06
OCBC Securities SGX Stock Analyst Report BUY Upgrade HOLD 3.33 Same 3.33