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

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.

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.

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