Author: tfwee
STEng – BT
ST Engg sees new period of growth
Aviation industry slowdown could provide growth opportunities, it says
THE aviation industry slowdown could well turn out to be a blessing in disguise for Singapore Technologies Engineering (ST Engg).
In an interview with BT yesterday, the group’s president and chief executive officer, Tan Pheng Hock, said the impact of a slowdown in the aviation industry on the company was ‘minimal’ at worst and could even provide growth opportunities.
‘Today is the best time to look at acquisitions to get access to markets and technology,’ he said. ‘For the last four years we have been buying companies, and this period may well be a good opportunity to accelerate the plan.’
Mr Tan’s words came amid a fall in the share price of ST Engg, which at $2.77 yesterday was a dollar lower than at the beginning of the year. The price drop, which came amid market turmoil over the US sub-prime crisis, saw the stock shed 15 per cent in value in June alone.
Mr Tan said the slump in ST Engg’s share price could also be due to investor concern about the impact of a slowdown in the US aviation industry on its aerospace arm, ST Aerospace, which does third-party maintenance, repair and overhaul (MRO) work for airlines in Asia and the United States.
ST Aero contributes roughly half of ST Engg’s revenues and slightly more than half its profit.
But Mr Tan pointed out that fleet reductions in the US by ST Aero customers such as Delta and Northwest would have little impact on ST Aero.
He said the cutbacks were mostly in old fuel guzzlers, rather than the modern more efficient planes ST Aero was mostly servicing.
‘The impact, if any, is minimal if at all,’ Mr Tan said, adding that as the existing fleets get worked more heavily, maintenance needs may actually increase.
Another ST Aero customer, Federal Express, recently reported a quarterly loss and issued a profit warning, but Mr Tan said this could even be positive for ST Aero as FedEx is in the process of converting old Boeing 757s to freight carriers, meaning that ST Aero could book higher revenues from such conversion projects.
Mr Tan said he saw 20 per cent of the company’s revenue in future coming from converting passenger aircraft for freight purposes, citing an Airbus study predicting that freighter fleets will almost triple in the next 20 years.
And in the longer term, ST Aero will benefit as carriers find it more cost-efficient to outsource MRO work, he said.
MRO outsourcing is projected to grow from 52 per cent of the market last year to 73 per cent in 2017.
ST Aero has been linked with a US$1 billion deal to service Lion Air’s new fleet of Boeings.
Mr Tan confirmed ST Aero was interested and said it would be a good partnership. ‘We think they are very strong in this market, and they can leverage on our safety record.’
Analysts have lowered target prices and in one case downgraded the stock of ST Engg.
DBS Vickers analyst Janice Chua said in a research note that the company was fully valued with a 12-month target of $2.80, down from $3.50.
‘ST Aerospace’s earnings can be a key indicator on the group’s overall performance and share price tends to be more vulnerable to bad news in the aviation sector,’ she noted.
ComfortDelgro – CIMB
Growth from overseas
• Fuel concerns. While costly fuel is a concern for regulated public-transport companies like CD in Singapore, CD is able to pass through higher fuel costs in its overseas bus operations. Domestically, an application for a fare hike has been made. We also expect a review of diesel subsidies for its Singapore taxi operations.
• Public transport ridership is up. Escalating petrol and diesel prices, more ERP gantries as well as increased ERP charges are forcing more private cars owners to take public transport. Monthly ridership for both rail and bus is encouraging, reflecting a positive shift in commuter behaviour towards public transport.
• Overseas business to drive the group. Management aims to raise its overseas revenue from 50% to 70% within the next 5-7 years. With this new target, we could reasonably expect growth to be spurred by possible M&As, as well as organic growth of its bus operations in the UK, Australia and China, supported by taxi operations in the UK and China.
• Forecasts and target price cut; but maintain Outperform. We lower our FY08-10 core net profit forecasts by 6-17% to factor in much higher diesel prices. However, dividend yield is attractive at 6% and valuations appear reasonable. Our DCF valuation prices the stock at S$2.09 (previously S$2.32) using an unchanged WACC of 9.3% and terminal growth rate of 2%.
STEng – OCBC
Gearing up for a short-term reversal
– ST Engineering (STE) suffered a severe decline over the last 12 months, shedding approximately 32% since it peaked at S$4.02 on 23 July 07.
– The oversold position and positive divergence currently being displayed by the stochastic indicator suggests that STE is in store for a rebound in the near-term.
– The reversal candlestick formation 2 trading sessions ago was on the back of high volume, indicating STE is attempting to reverse trend at this juncture,
– With the price currently hovering within a key support region of S$2.70 – 2.80, we feel a near-term base has been formed and we anticipate STE to head towards the S$3.10 – 3.15 resistance, which was a key reversal level since Mar 07.
SPH – AmFraser
SPH ($4.28) – Falls to low end of $4.20-60 trading band seen as opportunity to accumulate as long term 10-year support around $4-$4.20 signals a buy
Target price $4.50-60
Support $4.10-20
It is a marvel to know how under-performing SPH when we consider that its 1998 high was $3.93 and 10 years later it is hardly above water if we compare with this year’s $4.09 low.
Thus it is not surprising that patient traders would accumulate the stock whenever it drops to near $4.20 which is at the low end of its past 4 years’ trading range.
It may be hard to believe that when STI bottomed out at 1205 in March 2003, SPH had reached a high of $3.82 that month and when the new STI peaked at 3831 last Oct, SPH’s high was only $4.64, a gain of a mere 21% compared to 218% for the index.
It is thus hardly surprising that the counter has fallen out of traders’ radar screens but there are still some trading chances especially after a prolonged downtrend which has just been seen.
The price has fallen to its lowest level last week ($4.21) since its early April year’s high of $4.64 which matched the Jan 22 close of $4.21 when SPH hit intra-day low of $4.09 (STI also hit first support around 2860-70 that day). Underpinning this low is the 2007 low of $4.06.
With so obvious historical support around $4-$4.20, traders who have remembered this stock stuck around $4.40-60 for much of the time since late2006, would have the courage to accumulate around current levels as the chances of a return to this higher band are good.
After all SPH is still an index heavyweight with a market cap of $6.8b and attractive dividend yield of about 6% and trading around market PE of 13-14x with lots of loyal long term shareholders.
It should be relatively resilient to a market selldown based on its sluggish 10-year track record, which suggests the absence of stale bull positions.
The short term technical picture shows the daily MACD beginning to improve and the Bollinger bands suggest it is unlikely to break $4.20 support. In fact the 2-month sideways pattern should have ended and SPH moves back to its traditional $4.40-60 range.