STEng – BT

Warthog may stand ST Engg in good stead

SINGAPORE Technologies Engineering (STE) on Tuesday reported an 11 per cent rise in full-year net profit to $491 million, beating analysts' consensus estimates. What it may be proudest of at the moment, though, is not told in those numbers but in the story of a military vehicle named after a wild African pig.

The Warthog, a heavily-armoured amphibious vehicle made by the group's land systems arm ST Kinetics, has now been successfully deployed by the British Army in Afghanistan – if news reports coming out of the UK are anything to go by.

The significance of this requires some background. In December 2008, the UK's Ministry of Defence placed a $330 million order for over 100 Warthogs. This was in response to an urgent operational requirement for its troops in Afghanistan. The Vikings these vehicles were to replace had proven to be vulnerable to roadside bomb attacks in the harsh Afghanistan terrain, costing lives.

Though a contract win of $330 million is relatively small for a large conglomerate like STE, this particular one was something to cheer about, for more than the dollars and cents.

First, any deal at all during that period – the worst of the financial crisis – would have been welcomed, and the nature of this contract underlined STE's distinctive quality as a defence contractor. Defence spending tends to be more resilient than commercial expenditure in times of economic downturn.

STE's order book now stands at $11.5 billion, of which analysts say about $4.7 billion was secured last year. Of this, a CIMB report estimates that about 70 per cent is commercial and the rest, defence-related.

Second, and more salient perhaps, was what it signified: that this homegrown defence and engineering group is now capable of meeting the requirements of a premier armed force, and one involved in combat operations.

Observers said then that the UK win also soothed some of STE's disappointment from a failed bid years earlier. In 2000, the group bid for a US$4 billion contract to supply its Bionix Infantry Fighting Vehicle to the US Army, but lost. Competing against the world's bigger defence contracting players to secure the UK order eight years on was thus a triumph. It boosted STE's confidence as one with land system capabilities good enough for premier armed forces and undoubtedly enhanced its reputation in defence circles too.

The big question then was: could the Warthog deliver? With impressive on-paper specifications, the vehicle was a modified version of the Bronco All Terrain Tracked Carrier (ATTC), used by the Singapore Armed Forces since 2001 in peacetime service. It was clear to market observers and military watchers alike, though, that the proof would be in successful deployment.

That proof is now emerging, it seems, in various anecdotal news reports from the UK, though STE itself seems hesitant to blow its trumpet due to military sensitivities.

Local UK paper Dorset Echo reported last week that the first of the Warthogs arrived in Afghanistan last September, with final batches due to be sent over next month. It quoted an officer conducting trials in a UK camp as saying that not one had been destroyed to date. Another report from a local paper in Kent spoke of a Warthog commander who survived an explosion and is now hoping to marry his fiancee in August.

A third community paper in Hertfordshire, whose report was picked up by Singapore media last month, told the story of a British soldier whose Warthog ran over a booby trap of explosives; he survived, crediting his survival to STE's Warthog.

If the deployment continues to yield success stories like these, the value of reputation built up could far exceed the contract's dollar value and open doors to fresh contracts from the UK or other major armies in the longer term.

Going back to the numbers, analysts said this week that the 50 per cent jump in the automotive business that drove STE's land system arm's growth last year was possibly due to the delivery of the Warthogs. Most maintained 'buy' calls on the group, with at least one analyst from CIMB believing that its order book could exceed $12 billion, with upside surprise from defence contracts.

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