The Motley Fool

3 Reasons Why I’m Staying Away From ST Engineering’s Shares

Singapore Technologies Engineering Ltd (SGX: S63), or STE, is a global engineering, technology and defence group which serves the aerospace, electronics, land systems and marine sectors. The group serves customers in more than 100 countries and employs around 22,000 staff across offices in Asia, the USA, Europe and the Middle East.

STE is a conglomerate with a wide geographic reach and a long track record. In its latest earnings release (Q1 2019), the group reported a 5% year-on-year increase in revenue and an 11% year-on-year increase in net profit. Mr Vincent Chong, president and CEO of STE, has also said that STE’s plan is to be a major global player, with two-thirds of future growth coming from the global market outside Singapore.

However, I remain hesitant when it comes to investing in STE due to the three reasons below.

1. Flat revenue and erratic net profit

Source: STE Annual Report 2018

STE had embarked on various initiatives for growth over the last five years and also completed a few acquisitions (mainly for its aerospace division). However, the results have not shown up in the financial statements, as revenue has essentially been flat over the last five years, as seen from the table above.

Net profit has also been erratic and inconsistent and had actually fallen to S$494.2 million if investors compare it to the S$532 million reached in 2014. The inability of STE to drive organic and acquisitive growth through to its bottom line should be of great concern for investors.

2. Static dividends

Source: STE Annual Report 2018

From the table above, STE has not increased its dividends in the last five years, with gross dividend remaining constant at 15 Singapore cents per share. While investors may cheer the fact that the group has not reduced dividends, the fact that such a large blue-chip conglomerate has failed to increase its dividend seems to demonstrate that growth has been moribund.

At STE’s last traded price of S$4.19, the group’s historical dividend yield stands at 3.6%. As growth has not been strong over the last few years, I was expecting the dividend yield to be higher in order to compensate me as an investor, but a 3.6% dividend yield is not enticing enough to make me want to consider STE as a yield play.

3. Expensive valuation

Using STE’s Q1 2019 earnings per share (EPS) of 4.2 Singapore cents, and annualising it for the entire year, I obtain an annualised EPS of 16.8 Singapore cents. At the last traded price of S$4.19, this represents a price-earnings ratio of around 25 times. It appears that STE is trading at rather expensive valuations if I consider the fact that growth has been essentially flat over the last five years.

Hence, I am not willing to own a piece of the group at lofty valuations. Should the group demonstrate sustainable growth, or if the valuation comes down substantially, it may trigger me to take a second look.

Wary but watchful

When it comes to STE, I remain wary of the above three aspects, but I’m also watching the group as it had made a substantial acquisition in the past year, which may only show in the current year or future years. I will continue to keep STE on my watch list for now as I monitor its corporate developments.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.