ST Engineering – Why I Am Not Selling

Smart City

ST Engineering makes up 12.6% of my stock portfolio. If you are not familiar with this company, it derives its revenue from four key business segments: Aerospace, Electronics, Land Systems and Marine.

After ST Engineering has held its Annual General Meeting on 15th May 2020, the share price of ST Engineering has started to decline as investors started their sell off because of the impact of the COVID-19 pandemic to ST Engineering’s businesses.

First, let us understand how the COVID-19 pandemic has impacted ST Engineering. Second, how the company tries to mitigate these factors. The last is what the company is doing to keep investor’s confidence?

1. How COVID-19 Pandemic Has Impacted ST Engineering?

The COVID-19 pandemic has impacted ST Engineering in three areas: reduction in customer demand, supply chain and workforce disruptions. ST Engineering expects the Aerospace and Electronics sectors to experience more impact than Land Systems and Marine sectors. Land Systems and Marine have a higher portion of defence related projects, which collectively have provided revenue stability.

In the Aerospace sector, we have read about commercial planes being grounded and airport closures. ST engineering expects lower demand for airframe and engine and component MRO (maintenance, repair and operations). The production manufacturing timeline for original Equipment (OE), largely the engine nacelle manufacturing and composite floor panel manufacturing needs to be shifted to follow its customers timeline. The income stream from military customers continues to be steady.

In the Electronics sector, ST Engineering experienced deferments in some projects and tenders previously launched are now being placed on hold. These are due to travel and movement restrictions imposed in the countries they serve.

In the Land Systems sector, the defence related projects continues to provide revenue stability. Similarly to projects in the electronics sector, projects in its commercial business are deferred.

In the Marine sector, ST Engineering’s yards in Singapore and the U.S. are still operating, albeit on a reduced scale in Singapore mainly due to the workforce disruption.

2. Mitigation Measures Taken

ST Engineering has a diversified income streams from different business sectors and geographies. The income is further differentiated between customers from the commercial and military defence. As mentioned previously, the income from the military defence customers remains steady.

The directors have taken a cut in their director’s fees. As of 1st May 2020, the President and CEO will reduce his salary by 10%, while the senior management team will reduce their salaries by percentages ranging between 5% and 10%.

The group has received also support from various government aids and stimulus packages.

For the nine months from April to December 2020, the group expects to recognise $4.5b from the order book of $16.3b as of 31 March 2020, after delivery for the first quarter.

ST Engineering COVID-19 Mitigation

What is the company doing to keep investor’s confidence?

It is heartening to know that for the past seven years, ST Engineering has been consistently paying out 15 cents per share. This is also the reason why I am not selling away. The group has assured they have a strong balance sheet to sustain long-term growth and they will want to continue rewarding its shareholders by creating long-term shareholders’ value.

Frasers Centrepoint Trust 2Q2020 Financial Results

Waterway Point

I have written about My Personal Analysis of Frasers Centrepoint Trust back in the year 2017. Till date, Frasers Centrepoint Trust has 7 suburban malls in its portfolio. They are Causeway Point, North Point, Waterway Point, Changi City Point, Bedok Point, Yew Tee Point and Anchor Point. Frasers Centrepoint Trust also held 31.17% of the units in Hektar Real Estate Investment Trust (“H-REIT”).

What is the impact of COVID-19 pandemic to Frasers Centrepoint Trust? How does Frasers Centrepoint Trust fare against Capitaland Mall Trust? Let us take a look at its latest financial results below.

On 23rd April 2020, Frasers Centrepoint Trust has released their 2Q2020 financial results. Gross revenue improved by 0.9% to S$50.2 million. However, Net Property Income (“NPI”) fell 1.3% to S$36.0 million.

Distributable income increased by 25.0% to S$36.0 million. As Frasers Centrepoint Trust decided to retain 50% of the distributable income to preserve financial flexibility in current time of uncertainty, the final distributable income declined by 38.3% to S$18.0 million. A distribution per unit (“DPU”) of 1.61 cents was declared which is a declined of 48.7% as compared to 2Q2019.

2Q2020 Financial Results

2Q2020
(S$’000)
2Q2019
(S$’000)
YoY(%)
Gross Revenue50,16849,7330.9%
Net Property Income35,96436,444(1.3%)
Distributable Amount (Before Capital Retention)36,00228,80825.0%
Distributable Amount (After Capital Retention)18,00029,158(38.3%)
Distribution Per Unit (“DPU”) (cents)1.61031.37(48.7%)

Occupancy

As of 31st March 2020, the overall portfolio occupancy is 96.1%. With the COVID-19 temporary measures in place, landlords will not be able to terminate the lease of tenants or claim back the rented premises if the tenant is unable to pay the rent during the relief period of 6 months.

The manager of Frasers Centrepoint Trust had passed on the full property tax rebate to qualifying tenants. Tenants can utilize their cash security deposits to offset one month’s rental. Under the S$45m Tenant Support Package (“TSP”) enhancement, one month of rental rebate will be provided to tenants in targeted manner, prioritised by their needs and circumstances. There will also be one month rental waiver to all entertainment, education and tuition centre tenants affected by the mandatory closure orders from 26 March 2020 to 30 April 2020.

Debt

As of 31st March 2020, gearing ratio stood at 37.4%.

Current Dividend Yield

Based on the full year FY19 distribution of 12.07 cents and current share price of S$1.99, this translates to current dividend yield of 6.07%.

Summary

The current dividend yield of 6.07% is definitely attractive. As we are coming to the end of “Circuit Breaker”, more shops are opening up. This should bring back some shoppers.

However, as we are still in the midst of the COVID-19 pandemic, I will advice to buy in small lots because nobody can foresee the depth of the financial impact created by the COVID-19 pandemic, especially to the retail segment.

Similarly like Capitaland Mall Trust, I shall continue to monitor the financial results in the upcoming quarters.

CapitaMall Trust 1Q2020 Financial Results

CapitaMall Trust makes up 9.70% of my stock portfolio. During the stock market crash, I have added more of CapitaMall Trust given my confidence in CapitaMall.

On 30th April 2020, CapitaMall Trust has released their 1Q2020 financial results. How does the CapitaMall Trust fare? Let us take a look at the latest financial results.

For 1Q 2020, gross revenue improved by 6% to S$204.3 million as compared to 1Q2019. Net property income (“NPI”) improved 5.9% to S$148.3 million.

For 1Q 2020, in view of the uncertainty and challenges brought about by the rapidly evolving COVID-19 pandemic, CapitaMall Trust had retained S$69.6 million of its taxable income available for distribution to Unitholders. In addition, capital distribution of S$4.8 million for the period from 14 August 2019 to 31 December 2019 received from CapitaLand Retail China Trust in 1Q 2020 had been retained for general corporate and working capital purposes.

Thus, despite revenue growth and improved NPI, distribution per unit fell by 70.5% to 0.85 cents as compared to 2.88 cents that was paid in 1Q2019.

1Q2020 Financial Results

1Q2020
(S$’000)
1Q2019
(S$’000)
YoY(%)
Gross Revenue204,296192,7226.0%
Net Property Income148,300140,0985.9%
Distributable Amount (Before Capital Retention)106,007106,293(0.27%)
Distributable Amount (After Capital Retention)31,592106,293(70.3%)
Distribution Per Unit (“DPU”) (cents)0.852.88(70.5%)

Occupancy

The average portfolio occupancy stood healthy at 98.5%. With the COVID-19 temporary measures in place, landlords will not be able to terminate the lease of tenants or claim back the rented premises if the tenant is unable to pay the rent during the relief period of 6 months.

The manager of CapitaMall Trust will pass on the full savings from the property tax rebates granted by the government to tenants. On top of this, the manager had provided 100% rental rebates in April and May 2020 for almost all retail tenants. There is also additional rental waiver from 27 – 31 March for tenants ordered to close their premises by Ministry of Health since 27 March 2020.

With all these support to tenants in placed by CapitaMall, I can see that this has a positive effect of keeping the occupancy healthy.

Debt

As of 31st March 2020, the gearing ratio stood at 33.3%. If you are not aware, 100% of CapitaMall Trust’s assets are unencumbered.

Current Dividend Yield

Based on the historical payout of 11.97 cents in FY19 and current share price of S$1.85, this translates to a current dividend yield of 6.47%.

Summary

As of now, CapitaMall Trust is purely a retail REIT play. COVID-19 has change how malls operate and I believe even after “Circuit Breaker”, certain restrictions will permanently be there. An example will be limiting the number of shoppers for malls after “Circuit Breaker”.

On a positive note, CapitaLand Commercial Trust will be merging with CapitaMall Trust. After the merger, CapitaMall Trust will be a mixture of retail and office play. Post merger, this may cushion some of the impact of COVID-19 pandemic on the retail segment.

At current dividend yield of 6.47%, this is deemed attractive to me. However, as we are still in the midst of the COVID-19 pandemic, I will advice to buy in small lots because nobody can foresee the depth of the financial impact created by the COVID-19 pandemic.

I shall continue to monitor the financial results in the upcoming quarters