Valuation of ST Eng based on order book

ST engineering had been dropping like crazy the last few weeks, and very recently in the last few days, the sell down persisted at a much greater pace. I know that they had a weak quarter, and possibly they will end this financial year with similar revenue but weaker net profits. My class got cancelled, so I had some time to crunch some numbers.

Here's a fancy 5 yr key financial data taken from their site:

A few things to take note:

1. The net profit margin (Net profit/Revenue) hovers around 8% in 2009 to 9% in 2012.

2. The number of shares taken to calculate the earnings per share (EPS) increases from around 30 units to around 31 units.


(What units? EPS is net profit over shares, so if you manipulate the formula you'll get shares = net profit/EPS. And that's what I did. I took the net profit for each year divided by the EPS to get the shares, but I can't be bothered to convert to the proper units. Not that it mattered later on when I use it for calculations.)


The 10 yr order book is provided in the annual report 2013 too. Here it is:

Since the share price of a company should be forward looking, knowing the current order book for the next 10 yrs should determine the current price of the shares now. What I wanted to find out whether I can use the order book to guestimate future revenue booked. Since I know the historical net profit margins, I can guestimate the future net profits. If I divide this by the number of shares unit by the company, I'll have the future EPS. Multiply EPS by the historical PE ratio, I'll have the future price range, and I can decide from there what to do with this garbage-in-garbage-out number so expertly calculated.

Let's go.

First, a little back testing. Since they have the 10 yr order book data for 2003 and 2008, I can use it to see if this is even worth the bandwidth posting. Here it goes:

Assumptions:
1. Share units of 31 (more conservative than 30)
2. Net profit margins of 8% (more conservative than 9%)
3. PE range from 10 to 20 (theoretically it should be 10 yrs, isn't it, since it's a 10 yr order book)

10 yr order book for 2003: $4.6b
Net profit for 2013: $368 mil (4.6*1000*0.08)
EPS for 2013: 11.9 cts/shares (368/31)

Using PE of 10, share price = $1.19
Using PE of 15, share price = $1.78
Using PE of 20, share price = $2.37


So, based on this order book estimation model, I get around the price range of 1.78 to 2.37. Let's tally it with the historical share price around mid 2002 to mid 2005. You can see that from mid 2002 to end of 2003, the price hovers around a range of 1.6 to about 2. Alright lah.

Let's try for order book for 2008.

10 yr order book for 2008: $10.6b
Net profit for 2018: $848 mil (10.6*1000*0.08)
EPS for 2013: 27.3 cts/shares (848/31)

Using PE of 10, share price = $2.73
Using PE of 15, share price = $4.10
Using PE of 20, share price = $5.47

I attach the historical share price from 2007 to 2009 here. Price ranged from about 2 to 4. A little unfair cos it's the global financial crisis, so the PE is depressed by that event. I leave it to you to decide if you can use the order book as a suitable model of valuation based on this 2 samples.

Ah ha, here's what we've been waiting for. Let's try for order book 2013.

10 yr order book for 2013: $13.2b
Net profit for 2023: $1056 mil (13.2*1000*0.08)
EPS for 2023: 34.1 cts/shares (1056/31)

Using PE of 10, share price = $3.41
Using PE of 15, share price = $5.11
Using PE of 20, share price = $6.81


A big caveat here here is that this is of course a simplified model. I'm using net margin of 8% on any revenue booked, but it will change when the composition of the revenue is changed. It could be higher or lower. There's also another consideration - the dividend. Let's say the dividend, which is 15 cts now, will drop to 14 cts in the future. Based on 10 times PE, the yield will be a reasonable 4.1%, with the possibility of the share price 'upgrading' to a PE of 15, possibly booking another 50% capital gain.


My second tranche of averaging down will be a little more pessimistic. Here's a chart that I did quite some time ago before all the plunging of the share price recently.

3.3+ to 3.22 will be where my bullet is aiming. I'll see how it reacts around 3.3+ first before deciding further. And how did I react to the falling share price? Nothing. Unlike the past, I didn't put in more than what I can afford to lose, and this is not an s-chip like longcheer or china milk or ferrochina.


What a journey it had been from then and now lol!