Author: kktan
STEng – Kim Eng
Prized for stability and attractive yield
The big picture. Investors buy ST Engineering (STE) for its attractive 5% dividend yield. On its part, the company continues to deliver on its earnings despite a challenging environment. However, share price upside is limited by a lack of fresh catalysts. While we believe that the negative press on its India defence issue is overblown, any pullback on the back of this presents a good entry point. Fundamentally, the stock remains a Hold as the forward PER of 17x represents full value.
India debarment not a big deal. STE’s defence-related subsidiary ST Kinetics was blacklisted by India’s Criminal Bureau of Investigation in connection with a corruption probe at India’s defence procurement agency. STE said there is no evidence implicating them. However, with a reputation to protect, we understand its insistence in clearing its name. Though India has never been a major contributor to its defence earnings, the country’s potential as a major arms buyer is significant. A clean reputation is useful in bidding for defence contracts globally.
Yields sustainable. Following its 7% growth in net earnings for FY11, STE declared a final and special dividend totalling 12.5 cents per share for a full-year payout of 15.5 cents per share, or a yield of 4.9%. Exdate is 25 April 2012. Even though STE expects to maintain its healthy payout ratio of 90% of earnings, we note that it was cash-flow-negative in 2011 due to higher working capital on negative variances in receivables and advances, as well as higher capex. We expect this situation to normalise in FY12. Cash and equivalents stands at $1.36b.
Neutral, all things considered. STE’s $12.3b orderbook supports earnings across the different divisions. It also has a healthy mix of commercial and military contracts. The company expects to achieve higher earnings for FY12, which is in line with our forecast of a modest 7% earnings growth. This will support its dividend payout and mitigate any downside. However, a lack of clear catalysts also limits upside, hence our Hold recommendation on the stock. Our target price of $2.88 remains pegged at 15x forward earnings, in line with its historical mean.
STEng – Kim Eng
Prized for stability and attractive yield
The big picture. Investors buy ST Engineering (STE) for its attractive 5% dividend yield. On its part, the company continues to deliver on its earnings despite a challenging environment. However, share price upside is limited by a lack of fresh catalysts. While we believe that the negative press on its India defence issue is overblown, any pullback on the back of this presents a good entry point. Fundamentally, the stock remains a Hold as the forward PER of 17x represents full value.
India debarment not a big deal. STE’s defence-related subsidiary ST Kinetics was blacklisted by India’s Criminal Bureau of Investigation in connection with a corruption probe at India’s defence procurement agency. STE said there is no evidence implicating them. However, with a reputation to protect, we understand its insistence in clearing its name. Though India has never been a major contributor to its defence earnings, the country’s potential as a major arms buyer is significant. A clean reputation is useful in bidding for defence contracts globally.
Yields sustainable. Following its 7% growth in net earnings for FY11, STE declared a final and special dividend totalling 12.5 cents per share for a full-year payout of 15.5 cents per share, or a yield of 4.9%. Exdate is 25 April 2012. Even though STE expects to maintain its healthy payout ratio of 90% of earnings, we note that it was cash-flow-negative in 2011 due to higher working capital on negative variances in receivables and advances, as well as higher capex. We expect this situation to normalise in FY12. Cash and equivalents stands at $1.36b.
Neutral, all things considered. STE’s $12.3b orderbook supports earnings across the different divisions. It also has a healthy mix of commercial and military contracts. The company expects to achieve higher earnings for FY12, which is in line with our forecast of a modest 7% earnings growth. This will support its dividend payout and mitigate any downside. However, a lack of clear catalysts also limits upside, hence our Hold recommendation on the stock. Our target price of $2.88 remains pegged at 15x forward earnings, in line with its historical mean.
SIA Engg – CIMB
Steady take-off
SIA Engineering has all the ingredients of a quality stock: stable earnings growth, high ROEs, net cash, attractive dividend yields and undemanding valuations against peers.
We peg a higher P/E of 15x (5-year mean) in our blended valuation (previously 10x on recession trading band) following a more positive MRO outlook. We refine our EPS as we update some assumptions. Maintain Outperform with catalysts anticipated from strong earnings growth.
More heavy checks
We believe SIA’s workload alone can sustain utilisation rates at all of SIE’s six hangars. About 41 of SIA’s aircraft are due for D checks in 2012-13, in our estimation. These would comprise the first “D” checks (after five years of flying) for six A380-841s and 12 B777-312s. There are also 18 B777-212s scheduled for second “D” checks (after 10 years of flying). Management expects the hangars to be at least 70% utilised in the next five years, backed by long-term contracts and current order book.
Bullish on MRO
We are bullish on the MRO industry. According to the latest statistics released by IATA, asset utilisation for airlines in the passenger market had improved in Jan, even after adjusting for high Chinese New Year load factors. Despite climbing oil prices, passenger load factors remained at historical highs. As aircraft utilization rises, we expect demand for heavy maintenance services to rise.
Earnings recovery unappreciated
SIE has outperformed the market by about 11% since our upgrade in Feb 12. We see room for further upside given the steady growth of its MRO usiness. As risks of an economic downturn dissipate, we see a less likelihood of capacity cuts by airlines. In a bull market, SIAE could trade up to 19x forward P/E. We believe the market has not priced in its earnings growth of 5-7% through 2014 as SIE is trading at its Mar 10 valuations when its earnings dipped 10%. We prefer SIE to ST Engineering for its more attractive valuations (14x CY13 P/E vs. 17x CY13 P/E).
SIA Engg – CIMB
Steady take-off
SIA Engineering has all the ingredients of a quality stock: stable earnings growth, high ROEs, net cash, attractive dividend yields and undemanding valuations against peers.
We peg a higher P/E of 15x (5-year mean) in our blended valuation (previously 10x on recession trading band) following a more positive MRO outlook. We refine our EPS as we update some assumptions. Maintain Outperform with catalysts anticipated from strong earnings growth.
More heavy checks
We believe SIA’s workload alone can sustain utilisation rates at all of SIE’s six hangars. About 41 of SIA’s aircraft are due for D checks in 2012-13, in our estimation. These would comprise the first “D” checks (after five years of flying) for six A380-841s and 12 B777-312s. There are also 18 B777-212s scheduled for second “D” checks (after 10 years of flying). Management expects the hangars to be at least 70% utilised in the next five years, backed by long-term contracts and current order book.
Bullish on MRO
We are bullish on the MRO industry. According to the latest statistics released by IATA, asset utilisation for airlines in the passenger market had improved in Jan, even after adjusting for high Chinese New Year load factors. Despite climbing oil prices, passenger load factors remained at historical highs. As aircraft utilization rises, we expect demand for heavy maintenance services to rise.
Earnings recovery unappreciated
SIE has outperformed the market by about 11% since our upgrade in Feb 12. We see room for further upside given the steady growth of its MRO usiness. As risks of an economic downturn dissipate, we see a less likelihood of capacity cuts by airlines. In a bull market, SIAE could trade up to 19x forward P/E. We believe the market has not priced in its earnings growth of 5-7% through 2014 as SIE is trading at its Mar 10 valuations when its earnings dipped 10%. We prefer SIE to ST Engineering for its more attractive valuations (14x CY13 P/E vs. 17x CY13 P/E).
STEng – BT
ST Kinetics blacklisting covers all India agencies
Firm can still legally challenge blacklist, and wait for court ruling on arbitration
It’s official and any doubts have now been cleared.
Singapore Technologies (ST) Kinetics will not be able to do any defence business with India’s Ministry of Defence and all of its agencies, and not just the country’s defence procurement agency as the company had hoped.
In a fresh life line, though, the judge presiding over the case ruled yesterday that the Singapore-based defence supplier will be given an opportunity to legally challenge the blacklisting.
In a BT report yesterday, ST Kinetics had expressed concern over the fairness of the legal process surrounding its implication in a corruption case of a high-ranking Indian official, which has seen the company receiving a disbarment order in doing business with the Ordnance Factory Board (OFB). ST Kinetics was blacklisted following initial investigations conducted by India’s Criminal Bureau of Investigation (CBI), which was probing Sudipta Ghosh, the former director-general of OFB, over the award of defence contracts. Ghosh has since been charged with corruption. No charges have been levelled against ST Kinetics, but it found itself being barred from doing business with OFB according to the official order last week.
Owing to the ambiguity of the order, ST Kinetics had hoped that its blacklisting would only be limited to any dealings with the OFB and not other segments of India’s lucrative defence industry.
It had filed three petitions in the Delhi High Court accordingly to overturn the blacklisting decision on three tenders it had entered into with the Indian defence authorities. One was for it to supply 50,000 Singapore Assault Rifles (SAR) 21 carbines to the Indian Home Affairs Ministry through an off-set arrangement with the OFB and the other two were for two artillery gun tenders with the Indian Ministry of Defence.
In a hearing of the case in the Delhi High Court yesterday, ST Kinetics argued that since the debarment order only mentioned OFB, its other two petitions should hold, making the case for it to continue business with the defence ministry.
But the argument was quashed as representatives of the Indian defence authorities in the court yesterday confirmed that the blacklisting will apply to all dealings across the country’s defence ministry, including the OFB and other defence agencies.
The judge disposed of all three petitions filed by ST Kinetics earlier due to their loss of relevance as the blacklisting will also apply to the other two tenders that ST Kinetics had initially entered with the Indian Ministry of Defence.
Instead, the judge granted ST Kinetics the liberty to file fresh petitions, which will give the company a chance to legally challenge the blacklisting in its entirety.
ST Kinetics has been arguing that no incriminating evidence has been produced against it, and that it has been blacklisted purely on the basis of circumstantial evidence.
BT understands that ST Kinetics has also approached the Indian Supreme Court, where a hearing is due on March 26. It is understood that the company is fighting for the Supreme Court to rule that the case be resolved via international arbitration since there have been no criminal charges filed against the company by the Indian government.