ST Engineering - OCBC Investment 2016-02-01: Added S$1.2b of new orders in 4Q15

ST Engineering - OCBC Investment 2016-02-01: Added S$1.2b of new orders in 4Q15 ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI 

ST Engineering: Added S$1.2b of new orders in 4Q15 

 Most bad news likely in the price 
 Orders of S$1.2b won 
 Total return of 18.3% from here 

Still weighed by soft 3Q15 results 

  • Singapore Technologies Engineering’s (STE) weaker-than-expected 3Q15 results and the subsequent cut in FY15 PBT guidance continues to weigh on sentiment it seems; the stock continues to trade around 14% lower after falling from S$3.30 on 6 Nov. 
  • Understandably, the muted outlook for the Marine sector and a potential slowdown in the Aerospace sector due to sluggish global economic environment are causes for concern; but we believe that a lot of the negatives may have already been captured in the share price. 

Valuations are very attractive 

  • For one, the share price has corrected some 23% from the 2015 peak of around S$3.70. This has also resulted in a significant fall in its valuations. 
  • Based on Bloomberg’s consensus EPS, STE is now trading around 16x PER; it is also nearly 1.5 standard deviations (SD) below the 5-year mean. The last time STE was trading at 2 SD below the 5-year mean was in 2011. 

Orders are still coming in 

  • Secondly, all the doom and gloom about the company’s prospects in the Marine and Aerospace sectors may be a bit overdone. 
  • After all, STE is still sitting on a sizable order book of S$12.2b (as of end Sep 2015); while it expects to deliver to less than S$1.4b in 4Q15, it has also secured around S$1.2b of new orders in that quarter. These include S$344m of Marine orders, S$435m of Electronics orders and S$415m of Aerospace orders. 

Rising interest rate concerns may be overdone 

  • And STE, being a “yield” play, also felt the blow from rising interest rate concerns; but expectation of further hikes in US interest rates has mellowed somewhat. 
  • We note that the 10- year SG bond yield is currently lower post the Dec Fed hike than before the hike. 
  • Assuming STE pays out S$0.14/share dividend this year, the forecast yield is fairly attractive at 4.9%. 

Maintain BUY with S$3.22 fair value 

  • Last but not least, we noticed that the company has resumed buying back shares – it has bought back nearly 3m shares at an average of S$2.90 between 20 Nov 2015 and 11 Jan 2016; this brings the total shares bought back to 11.7m. 
  • Maintain BUY with an unchanged S$3.22 fair value (19x FY16F EPS).

Carey Wong OCBC Securities | http://www.ocbcresearch.com/ 2016-02-01
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 3.22 Same 3.22