Benjamin Graham is a legendary figure in the investing world. Not only is he an investor with a fantastic long-term track record, he is also an important mentor to billionaire investor Warren Buffett. In addition, Graham’s the author of two influential investing texts, Security Analysis and The Intelligent Investor. While it’d be impossible now to ask Graham about what he thinks of the companies in Singapore’s stock market (he had sadly passed away in 1976), he did develop a 10-point investing checklist during his investing career. Let’s run Singapore Technologies Engineering Ltd (SGX: S63) through the checklist to find out what…
Benjamin Graham is a legendary figure in the investing world. Not only is he an investor with a fantastic long-term track record, he is also an important mentor to billionaire investor Warren Buffett. In addition, Graham’s the author of two influential investing texts, Security Analysis and The Intelligent Investor.
While it’d be impossible now to ask Graham about what he thinks of the companies in Singapore’s stock market (he had sadly passed away in 1976), he did develop a 10-point investing checklist during his investing career. Let’s run Singapore Technologies Engineering Ltd (SGX: S63) through the checklist to find out what Graham may think of the company
But first, here’s a brief background on ST Engineering. As its name suggests, the company’s an engineering group. But, it does have diverse engineering businesses, judging by its four main business segments: Aerospace, Electronics, Land Systems, and Marine. While ST Engineering’s a Singapore-based company, it has a multi-national reach, serving customers in over 100 countries.
With that, let’s look at ST Engineering through the lenses of Graham’s 10-point investing checklist (all data from S&P Global Market Intelligence unless otherwise stated):
1. An earnings-to-price yield at least twice the triple-A bond rate.
An earnings-to-price yield is the inverse of the P/E ratio. Based on ST Engineering’s latest financials (for the 12 months ended 31 December 2015), it has an earnings per share of S$0.17. Together with the current stock price of S$3.40, the company has an earnings-to-price yield of 5%.
According to the Monetary Authority of Singapore, the 10-year Singapore government bond has a yield of 1.99% at the moment; Singapore currently has a triple-A credit rating from a number of credit rating agencies. So as you can see, ST Engineering’s earnings-to-price yield is at least twice a triple-A bond yield.
2. P/E ratio that is 40% or less than the highest P/E ratio the stock has had over the past five years.
ST Engineering’s highest PE ratio over the last five years is 24.3 and it was seen on April 2013. With the company’s current P/E only at 19.9, that’s 82% of the peak P/E, which is much higher than Graham’s preference for 40% or less. .
3. A dividend yield of at least two-thirds the triple-A bond yield.
ST Engineering’s dividend yield at its current price stands at 4.41% thanks to its total dividend of S$0.15 per share in 2015. The yield of a triple-A bond, as we have seen, is 1.99%, which is less than the engineering firm’s dividend yield.
4. A stock price down to two-thirds or less of the company’s net tangible assets (NTA) per share.
ST Engineering’s net tangible assets stand at S$0.45 per share. That’s a lot lower than its current share price of S$3.40.
5. A stock price down to two-thirds or less of net current asset value (total current assets less total liabilities).
With ST Engineering’s total current assets of S$4.79 billion and total liabilities of S$5.91 billion, it would mean the company’s net current asset value is negative (-S$1.11 billion).
6. Total debt less than net tangible assets (NTA).
ST Engineering has total debt of S$1.19 billion, which is lower than its net tangible assets of S$1.39 billion.
7. Current ratio (total current assets divided by total current liabilities) of 2 or more.
As mentioned earlier, ST Engineering has total current assets of S$4.79 billion. With total current liabilities of S$3.72 billion, the company thus has a current ratio of only 1.29.
8. Total debt equal to or less than twice the net current asset value.
We’ve seen earlier how ST Engineering has a negative net current asset value while it has a positive total debt number.
9. Earnings growth of 7% compounded over the past 10 years (or a doubling of earnings over the past 10 years).
From 2005 to 2015, ST Engineering has seen its earnings per share increase at a compounded rate of merely 2.26% from S$0.13 to S$0.17.
10. No more than two years of declining earnings of 5% or more over the past 10 years.
ST Engineering’s earnings per share had suffered falls of 5% or more in three out of the past ten years. That would be 2008 (a 6.68% decline), 2009 (6.56%) and 2014 (8.9%).
In tallying up the scores, we can see that ST Engineering has ticked just three out of the 10 boxes in Graham’s checklist. This would mean that it’s unlikely the legendary investor would like the company.
But, it’s worth noting that investors with a different investing preference as compared to Graham can have a completely different opinion about ST Engineering – and that’s fine too.
For more investing tips and tricks and updates on what's happening in the world of finance, you can sign up here for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Esjay owns shares in Singapore Technologies Engineering.