Friday, September 5, 2014

My thoughts on ST Engineering Part 1

I did some more preliminary reading on ST engineering. Here are some of my thoughts:

First criteria of cash generating business is fulfilled. WIth the exception of 1 year, every year it generated FCF. Next, it is sustainable. The payout in terms of earnings is usually 0.9 to 1, but for 2013, it is 0.8 What attracted me is the FCF to payout ratio for the last 2 years are low, at 0.65 and 0.72. It seems to me that from 2009 onwards, ST has been able to sustain its growth and dividend payout through its FCF. As for ROE numbers and etc, you can see for yourself that it is high and consistent

I then again run a few combinations of DCF calculations based on the very conservative av. FCF of 420 mio for the past 12 years. (exclude the one-off negative FCF year.) For it to be trading at 3% growth and 6% discount rate with MOS of 20%, the price is $3.8 I would think the 6% discount is rather liberal, unless I can ascertain it can continue to grow above 3%. I decided to go deeper into the aerospace segment:

1)  Durable Goods Orders Surge 22.6% in July

This is the news that spur me to read further. The highlight of that article is "Transportation orders jumped 74.2 percent, the highest increase ever, boosted by a surge in bookings for civilian aircraft, which soared 318 percent, the largest increase since January 2011."


2) Worldwide number of aircraft orders* from Airbus and Boeing between 2003 and 2013


From the chart,


Since the last 3 year period is the strongest in a decade, and looking at 8 months order of both Boeing and Airbus, after adjusting for cancellation, total orders is 1633.

(Source: http://www.reuters.com/article/2014/09/04/us-airbus-group-orders-idUSKBN0GZ0VX20140904)

Seem to follow the trend of 3 good years followed by a dip.

Nonetheless ST Engineering 2013 AR has the to say:

"According to consultancy ICF SH&E, the global aircraft fleet is expected to grow by 950 aircraft a year, from 27,000 aircraft in 2013 to about 35,600 aircraft in 2022. The MRO market is expected to grow at a compounded annual growth rate of 4.1% from US$59.2b in 2013 to US$84.7b in 2022."

The bigger picture seems mildly positive.

Then I track the operation review of the sector from 2010. They have a good execution record. The only delay in estimated execution is the Aerospace Guangzhou, which they announced in 2011 that it will commence operation in late 2013. But in the announcement in 14 July 2014, Guangzhou Aerospace is in operation.

As for other executions, they bought AERIA in 2011, which retrofit the interior of aircraft for VIP cabins and provide customised service. It won contracts both in 2012 and 2013.

The flight school is Australia is also expanding since 2011. The Rotatable Leasing arm set up in 2012 are expanding offices in 2013

IN 2013, they announced a JV dealing with the leasing of aircraft. Could it be another growth area together with the now operational Guangzhou Hanger? 

In short, they seem to be able to execute what they set out to do.

A quick look at the various financial review of the various sectors, it seems land system is the only one with weak numbers. e.g. volatile ROE etc, but the worst in the last 5 years is still a decent 22.2% IMHO


http://www.stengg.com/AR2013/download/STE_AR_2013_Sectoral%20Financial%20Review.pdf


I will be reading on the other sectors as and when I can find the time. If I cannot be confident of a higher growth prospect in the longer term, current valuation seem fair, with its 4% yield.

7 comments:

  1. Hi sillyinvestor,

    Note that the payout of ST eng will be gradually cut, from 90% to eventually 75%. The reason they gave is that their earnings are based more on overseas now, so they will need to pay withholding tax on overseas income, so that will reduce their ability to pay higher dividends.

    The source is here:
    http://sgx.i3investor.com/blogs/sgxstockwarrant/15082.jsp

    Waiting for your next post :)

    ReplyDelete
  2. LP!!!

    You are my second guest after SMOL

    Welcome welcome...

    Hmm.. 75% ... When FCF is so high? Lame excuse...

    But it seems ST is a bedrock of Singapore Inc if u know what I am saying...

    Very interested. But given limited ammo, I might have to switch out of 1 of my counter

    ReplyDelete
  3. Hi Sillyinvestor

    I think its good that they reduce their payout. Their roe has been gradually dropping for the past couple of years. It seems that the growth has somewhat stallled and i am.not sure how the minor retained earnings are going to help them boost their business. Your 3% growth on valuation seems reasonable though I would put a higher discount rate higher than 6%. 6% seems to appear really safe I would maybe try 8 or 9% just to see where it stands.

    ReplyDelete
    Replies
    1. Hi B,

      Great, finally had a feeling of new house warming.

      I also think it is more prudent to have a lower payout, but setting a ceiling and giving a lame reason is just ...

      Overseas operation forming bulk of revenue? Hello, I think you have that since 2009, why are u doing that now?

      If you use higher discount rate like 7 or 8 %, current price offer no MOS or is even trading at a premium.

      I personally think it is fair value for a bedrock company. In fact, I am watching it very closely. Between this and Venture, I am more confident of the longer term prospects of ST. Although Venture give better yield and should do ok over the next few years with US capex cycle returning

      Delete
  4. First, congratulation on successfully migrated to blogspot. Very good analysis and thanks for your sharing. I'd added your blog into my blogroll.

    David

    ReplyDelete
  5. Thank you David. I will add you to my blog roll too. Glad you find my analysis useful. Hope we can exchange pointers

    ReplyDelete