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Was Chip Eng Seng Corporation Ltd’s (SGX:C29) Earnings Decline Part Of A Broader Industry Downturn?

Measuring Chip Eng Seng Corporation Ltd’s (SGX:C29) track record of past performance is an insightful exercise for investors. It enables us to reflect on whether the company has met or exceed expectations, which is a powerful signal for future performance. Below, I will assess C29’s recent performance announced on 31 March 2018 and compare these figures to its historical trend and industry movements. See our latest analysis for Chip Eng Seng

Despite a decline, did C29 underperform the long-term trend and the industry?

C29’s trailing twelve-month earnings (from 31 March 2018) of S$32.92m has declined by -24.37% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -11.13%, indicating the rate at which C29 is growing has slowed down. What could be happening here? Let’s examine what’s going on with margins and if the rest of the industry is facing the same headwind.

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Revenue growth in the last couple of years, has been positive, nevertheless earnings growth has been falling. This means Chip Eng Seng has been increasing expenses, which is hurting margins and earnings, and is not a sustainable practice. Eyeballing growth from a sector-level, the SG construction industry has been enduring some headwinds in the previous twelve months, leading to average earnings dropping by more than half. This is a a strong change, given that the industry has been delivering a relatively flat growth rate over the past few years. This means that whatever headwind the industry is facing, it’s hitting Chip Eng Seng harder than its peers.

SGX:C29 Income Statement June 22nd 18
SGX:C29 Income Statement June 22nd 18

In terms of returns from investment, Chip Eng Seng has not invested its equity funds well, leading to a 6.48% return on equity (ROE), below the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 1.94% is below the SG Construction industry of 3.21%, indicating Chip Eng Seng’s are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for Chip Eng Seng’s debt level, has declined over the past 3 years from 16.24% to 2.18%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 104.06% to 187.50% over the past 5 years.

What does this mean?

Though Chip Eng Seng’s past data is helpful, it is only one aspect of my investment thesis. Usually companies that experience an extended period of diminishing earnings are undergoing some sort of reinvestment phase Though if the whole industry is struggling to grow over time, it may be a sign of a structural change, which makes Chip Eng Seng and its peers a riskier investment. I recommend you continue to research Chip Eng Seng to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for C29’s future growth? Take a look at our free research report of analyst consensus for C29’s outlook.

  2. Financial Health: Is C29’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 31 March 2018. This may not be consistent with full year annual report figures.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.