ST Engineering - OCBC 2015-11-18: Upgrade to BUY; recent sell-down overdone

ST Engineering - OCBC 2015-11-18: Upgrade to BUY; recent sell-down overdone ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI 

ST Engineering: Upgrade to BUY; recent sell-down overdone 

 Most bad news likely in the price
 S$12.2b order book on hand
 Total return of 14.3% from here 


Stock down 12% after soft 3Q15 results 

  • Singapore Technologies Engineering (STE) reported a softer-than-expected set of 3Q15 results on 6 Nov, where revenue and core earnings both slipped 3% YoY; and due to the still weak outlook for the Marine sector, it has also lowered its FY15 PBT guidance from comparable to lower than FY14. 
  • Understandably, we have also cut our rating to Hold with a lower fair value of S$3.22 (based on 19x FY16F EPS). 
  • In reaction to the results and lower PBT guidance, STE’s stock price fell nearly 12% from a close of S$3.30 on 5 Nov to an intraday low of S$2.92 on 16 Nov. 

Value is starting to emerge 

  • However, like in our previous report on 6 Oct when we upgraded our call to Buy when the stock price was around S$3.00 then, we now see value emerging as well. 
  • No doubt that the outlook has softened somewhat compared now, but recall that STE is still sitting on a sizable order book of S$12.2b, of which it will deliver no less than S$1.4b in 4Q15; and this still leaves nearly S$11b worth of orders to work through over the next two years. 
  • Moreover, with the current share price now hovering around S$2.94, we opine that much of the negative news flow may have been captured in the recent correction. 

Upgrade to BUY with an unchanged S$3.22 fair value 

  • Indeed from a valuation perspective, the consensus PER has fallen back to below 1 standard deviation below the 3-year average; it was last below 1-SD when we upgraded the stock back in Oct. 
  • Hence on this ground, we again upgrade our call from Hold to BUY. 
  • While we are maintaining our fair value unchanged at S$3.22, do note that the company is still committed to paying out at least 90% of its NPAT as dividend, which should work out to a pretty decent yield of 4.4%, giving a total return of 13.9% from here. 
  • Last but not least, the company has an existing share buyback mandate – it has bought back some 8.75m shares at a weighted average of S$3.00 between 19 Jun and 1 Sep 2015, and can buy back another 53.4m shares. 


Carey Wong OCBC Securities | http://www.ocbcresearch.com/ 2015-11-18
OCBC Securities SGX Stock Analyst Report BUY Upgrade HOLD 3.22 Same 3.22


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