Singapore Technologies Engineering Ltd Is Near Its 52-Week Low: Is It A Bargain?

Ser Jing - ST Engineering First Quarter Results, Unchanged Revenue and Profit (pic)

Singapore Technologies Engineering Ltd (SGX: S63) is an integrated engineering group that focuses on both the commercial and defence sector. It has four main business segments: Aerospace; Electronics; Land Systems; and Marine. As one of the constituents of the Straits Times Index (SGX: ^STI), the company has operations all over the world.

Interestingly, after the company released its latest quarterly results last week, its share price has steadily slipped to S$3.65, which is just a tad higher than its 52-week low of S$3.64. Is there a bargain opportunity with this engineering-based blue chip?

A consistent workhorse

ST Engineering has been one of the most consistent companies in the STI in terms of its corporate performance in recent years. From 2009 to 2013,  its net profit had grown in each consecutive year at a compounded annualised rate of around 6.95%. Along the way, its dividend yield has never dropped below 3.8% and its return on equity has been hovering around the 30% mark.

All these have helped its share price to appreciate by more than 40% within five years.

What goes up must come down

Unfortunately, seas are rarely smooth for long. The company saw a drop in both its revenue and profit for the first half of this year. For a company that has been growing consistently since 2009, that likely did not seat well with the market.

Is it structural or cyclical?

As with any turnaround investment we want to make, we should always ask ourselves: Are the current challenges faced by the company cyclical or structure in nature? The key difference is that companies confronting a structural decline – an extreme example would be horse carriage manufacturers during the dawn of the era of automobiles – would have almost no way of pulling its business back to its old glory days and investors who mistakenly invest in one would be in for a rough time. A cyclical issue on the other hand is merely due to the normal ebb and flow of the business cycle and is normally a temporary setback.

On the surface at least, the problems ST Engineering faces seem to be temporary in nature: It is facing weaker markets, higher operating costs, and foreign exchange risks. That said, it’s often the case where structural issues will only become obvious when it has become far too late for a company to react. For instance, brick-and-mortar book retailer Borders never took the threat from Inc seriously when the latter first got into the business of selling books online in the late 1990s. By the time gained significant market share, it was already too late for Borders to react – the company filed for bankruptcy in 2011.

Therefore, investors looking at ST Engineering now should take a moment to understand the company and industry thoroughly before making any investment decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above