ST Kinetics seeks reversal of debarment

STE maintains innocence

India debarment has no impact

ST Kinetics seeks to negate debarment

ST Engineering (STE) last Friday announced that its subsidiary ST Kinetics (STK) has filed a writ petition with the High Court of Delhi in New Delhi, naming India’s Ministry of Defence and Ordnance Factory Board (OFB) as respondents. With the filing of the writ petition, STK is seeking to negate an OFB debarment order that prohibits STK from ‘further business dealings with the OFB for a period of 10 years.’ To recap, the OFB debarred a number of defence companies, including STK, from doing business in India after evidence of illegal gratification to officials, including Sudipto Ghosh, the former Director General of the OFB.

STE maintains innocence

Since news of the debarment broke out, STE has maintained its innocence and sought to clear its name of any shenanigan. In addition, STE disclosed that STK has never won any defence contract or exported defence sales to India, since developing defence export sales is usually a long process. Thus, STE has not included any expected sales to India in its FY12 guidance. Furthermore, STE’s recent ~S$880m contract win to build patrol vessels for the Royal Navy of Oman, demonstrated its ability in winning defence contracts has not been compromised by the India debarment.

Minimal negative impact

With the vigorous insistence of its innocence, STE’s ability to win defence-related contracts is unlikely to be diminished and the likelihood of its share price taking a big hit from this issue is low. In addition, STE has explicitly said the debarment has no impact on its financial performance and maintains its FY12 guidance. However, STE’s attempt to reverse the OFB debarment order, even if successful, will require many years’ time and effort.

Maintain buy

We maintain our fair value estimate of S$3.50/share and BUY rating on STE.

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