Currently, Singapore Technologies Engineering Ltd’s (SGX: S63) shares are trading at S$3.24 apiece. This is merely 2.2% higher than a 52-week low of S$3.17. Investors looking at the engineering conglomerate now may thus be wondering: Could ST Engineering be a bargain stock? There is no easy answer, but we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street. Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up an incredible annualised return of 29%. In One Up On Wall…
Currently, Singapore Technologies Engineering Ltd’s (SGX: S63) shares are trading at S$3.24 apiece. This is merely 2.2% higher than a 52-week low of S$3.17. Investors looking at the engineering conglomerate now may thus be wondering: Could ST Engineering be a bargain stock?
There is no easy answer, but we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street.
Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up an incredible annualised return of 29%. In One Up On Wall Street, Lynch wrote about a general checklist he had used when he was searching for investing opportunities. Let’s run ST Engineering through the checklist and see what turns up.
1. The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?
ST Engineering has a PE ratio of 19.6 at the moment. The chart below shows the company’s PE ratio over the past five years, and you can see that ST Engineering’s current valuation is in the middle of the trading range for the timeframe we’re looking at. This suggests that the engineering conglomerate’s PE is neither low nor high.
Source: S&P Global Market Intelligence
For another perspective, we can look at the PE ratios of Sembcorp Industries Limited (SGX: U96) and Keppel Corporation Limited (SGX: BN4). Comparing ST Engineering with Sembcorp Industries and Keppel Corp is not apples-to-apples, since Sembcorp Industries is an utilities and marine engineering conglomerate, while Keppel Corp is a property development, marine engineering, and infrastructure conglomerate. But, looking at the PE ratios of the three companies can still give us some contenxt.
Right now, Sembcorp Industries and Keppel Corp have PE ratios of 17.4 and 16.6, respectively. This suggests that ST Engineering’s PE ratio is reasonable.
2. What is the percentage of institutional ownership? The lower the better.
This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.
ST Engineering has a high level of institutional ownership according to its 2016 annual report. As of 27 February 2017, Temasek Holdings controlled 50.99% of the engineering conglomerate’s shares. Temasek is one of the Singapore government’s investment arms, and is also one of the largest sovereign wealth funds in the world.
3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.
Over the past six months, ST Engineering has bought back shares on six occasions, spending $14.78 million on 4.2 million shares. But, there were no insider purchases for the same period.
4. What is the record of earnings growth and whether the earnings are sporadic or consistent?
Here’s a record of ST Engineering’s earnings per share over the past decade from 2006 to 2016:
Source: S&P Global Market Intelligence
We can observe that ST Engineering has been consistently generating profits for a long time. That’s great. But, there has been no sustained growth in the company’s earnings per share. In fact, its earnings per share in 2016 was merely 3% higher than in 2006.
5. Does the company have a strong balance sheet?
Based on its latest financials as of 30 September 2017, ST Engineering had S$791.3 million in cash and equivalents, and S$1.13 billion in total debt. This gives rise to a net-debt position of S$340 million.
But, the conglomerate had generated S$245.8 million in free cash flow in the first nine months of 2017 alone; according to data from S&P Global Market Intelligence, ST Engineering’s free cash flow had averaged S$367 million from 2014 to 2016. This level of free cash flow makes the net-debt position highly manageable.
A final take
On the positive side, ST Engineering has a PE ratio that’s in-line with similar companies, been buying back its shares, a good record in generating profits, and a reasonably strong balance sheet. The negatives are a PE ratio that’s lukewarm in relation to history, a high level of institutional ownership, and a lack of growth in its profits over the past decade.
On balance, Lynch may find ST Engineering worthy of a deeper look. But, it should be noted that Lynch’s checklist, as useful as it may be, should only be seen as an informative starting point for further research.
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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 writer Chong Ser Jing owns shares in Keppel Corporation.