Two important questions to ask before you buy Singapore Technologies Engineering Ltd (SGX:S63) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine S63’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
What is free cash flow?
Singapore Technologies Engineering generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of Singapore Technologies Engineering’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Singapore Technologies Engineering’s yield of 3.04% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Singapore Technologies Engineering but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Singapore Technologies Engineering?
Can S63 improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, the company is expected to grow its cash from operations at a low single-digit rate of 1.9%, increasing from its current levels of S$807m to S$823m. Furthermore, breaking down growth into a year on year basis, S63 is able to increase its growth rate each year, from -6.9% next year, to 9.5% in the following year. The overall future outlook seems relatively optimistic if S63 can maintain its levels of capital expenditure as well.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Singapore Technologies Engineering as opposed to the diversified market portfolio, and also being compensated for less. Furthermore, its muted operating cash flow growth doesn’t seem appealing. Now you know to keep cash flows in mind, I suggest you continue to research Singapore Technologies Engineering to get a more holistic view of the company by looking at:
- Valuation: What is S63 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether S63 is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Singapore Technologies Engineering’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.