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Keppel And ST Engineering Boast Defensive Credentials

Shares Investment

Tradeable Ideas is a new weekly column by Tradeable. This column focuses on locally listed companies or particular sectors that have attracted strong interest from analysts at various research houses. Tradeable Ideas is meant to serve as a springboard for investor’s interest in specific stocks or sectors in Singapore.

The recent market volatility has pushed many stocks lower to pre-May levels. Although a lot of liquidity has left the market (investors selling and keeping cash), some of the liquidity has stayed in the market, funnelling into defensive plays. We acknowledge this movement and because of this, will cover two defensive mainstays of the Straits Times Index. They are Keppel Corporation and Singapore Technologies Engineering.


*Prices are accurate as at 11:10AM on 11 July 2013

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Keppel Corporation
Recently, Keppel Corporation (Keppel) announced a US$210 million contract win from PV Drilling for a jack-up rig. While the contract win is not particularly large, analysts do point to better margins for this particular contract. They note that the contract is priced at a US$5 million premium to a separate recent contract win.

The contract win brings Keppel’s year-to-date order win to about $3.4 billion about 60 percent of DBS Vickers’ projection of $6 billion for the whole of 2013. Coupled with previous contracts, Keppel’s order books have hit about $14.4 billion. The huge order book will provide strong earnings visibility for the short to medium term. It also presents one of the strongest defensive capabilities a counter can boast about.

Also, the offshore and gas industry in Singapore is expected to see robust demand for rig construction. PV Drilling recently commented that it is witnessing strong increases in rates for its rigs and expects to invest in more rigs in the medium term to keep up with demand. With rising population and growing economic strength, Southeast Asia is poised to make efforts to step up exploration and development of resources.

Below are some main points on why we feel Keppel remains a good defensive play during periods of high volatility in stock markets:

  1. Strong order book provides high earnings visibility

  2. Above average growth in demand for rig construction

  3. Significant and growing dividends (FY10: $0.42, FY11: $0.43, FY12: $0.45)

Calls from analysts affirm Keppel’s growth and defensive characteristics. General consensus indicate that Keppel will appreciate about 17.6 percent.


Source: FactSet, 1-month technical chart on Keppel

From a technical perspective, Keppel looks to be on a bullish trend as the shorter two-days moving average line is currently above the longer, 19-days moving average line. However, with volatility rife, investors might not want to go in now. Instead, they should wait till the trend reverses before looking for buying opportunities.

Singapore Technologies Engineering
Singapore Technologies Engineering (ST Engineering), a national champion, has also got some things going on for it. For one, it recently announced that its subsidiary, ST Electronics secured about $206.8 million worth of contracts in 2Q13. As of 31 March 2013, ST Engineering’s order book has hit a new high of $13 billion, adding to earnings visibility in the near to medium term.

In terms of strategic growth, ST Engineering intends to acquire aerospace entities to fuel some of its growth. In addition, new hangar facilities and engine workshops in China will help it expand in the orient. Looking elsewhere, the company is looking to expand into the ship-repair business in the US.

Notably, ST Engineering is sitting on a cash hoard of about $500 million. Its net cash position will help its ambitions for more acquisitions as well as help it negotiate a possible increase in interest rates. Also, ST Engineering continues to expect higher revenue and profits in FY13. Specifically, management expects higher revenue and comparable profits for its 1H13 financial report card. Hence, 2H13 is likely to be a strong financial period for the group.

We have collated some defensive characteristics of ST Engineering that will put it in good stead to weather market volatility:

  1. $13 billion order book underpins future earnings

  2. Diversified business model (aerospace, electronics, ship repairs)

  3. Net cash position

  4. Growing and stable dividends (FY10: $0.1455, FY11: $0.155, FY12: $0.168)

With the latest market correction, ST Engineering has started attracting attention from investors. Market watchers continue to like ST Engineering for its defensive capabilities and have provided a consensus of 6.9 percent appreciation.


Source: FactSet, 1-month technical chart on ST Engineering

ST Engineering looks to be dangerously close to breaking its support level (19-days moving average line). However, the recent pick-up has provided some breathing space from its support line. Nothing much from the technical perspective, except that investors may probably want to wait out the current trend first.



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