ST Kinetics braces itself for fallout from India

It’s official now and the fallout could be far-reaching.

Singapore Technologies (ST) Kinetics confirmed that it had received a formal order from the Indian defence agency blacklisting it from defence deals with the government of India for the next decade.

Legal documents reveal that the land systems company may also face potential damage settlement and criminal charges.

The Singapore company has already indicated that it would take legal steps in India to clear its name.

ST Kinetics had maintained, until recently, that ‘there were no official statements or notifications from the Indian authorities’ on an alleged blacklisting of the company from doing business with the India’s defence procurement agency, the Ordnance Factory Board (OFB).

But the company yesterday said ‘it has since received an Order dated 5 March 2012 from the OFB ordering: (a) the cancellation of all agreements with ST Kinetics, specifically a Non-Disclosure Agreement signed on 11 August 2008 with the OFB; and (b) that ST Kinetics be debarred from entering into any contract with the OFB for a period of 10 years’.

Last year, ST Kinetics had approached the Delhi High Court after receiving a show-cause notice on why it should not be barred from doing business with the Indian government. The court said that ‘the notice (by OFB) proposes to take action against the petitioner (ST Kinetics)’ which entails ‘cancellation of the Non-Disclosure Agreement; debarring the petitioner from entering into a contract with Government of India for a period of ten years, and; recovering from the petitioner the loss sustained by the Ordnance Factory Board due to cancellation of the agreement.’

ST Kinetics confirmed yesterday that the non-disclosure agreement has been cancelled and it has been blacklisted by the Indian government for 10 years. It remains to be seen if this would now lead to any damages incurred by the company.

The court order, dated May 11, 2011, also specified that the alleged conduct of corruption ST Kinetics was suspected of is deemed as criminal.

‘The alleged conduct of the petitioner (ST Kinetics), in the present case, however, if believed to be true, is a criminal conduct,’ the judge ruled.

The company was dragged into the case following a report by the Comptroller and Auditor-General of India (CAGI), which outlined the behaviour of the former director-general of OFB, Sudipta Ghosh, who is at the heart of the case, and his involvement with ST Kinetics and six other defence companies ranging from India, Israel, Russia and Switzerland.

ST Kinetics had an agreement with Mr Ghosh’s agency to supply 50,000 Singapore Assault Rifles (SAR) 21 carbines to the Indian home affairs ministry (MHA). Mr Ghosh claimed that ST Kinetics would co-produce the weapons with an Indian partner. No such arrangement existed, the report said.

Mr Ghosh recommended that MHA purchase the weapons even though they had failed one of the two trials they were put through, the report added.

Nevertheless the court order states that both parties had ‘entered into a Non-Disclosure Agreement (NDA) on 30 July, 2008 / 11 August, 2008 … as a preliminary step to explore the possibility of supply of the required Arms and Ammunition by the petitioner (ST Kinetics) to the respondent (OFB)’.

ST Kinetics’ senior counsel in Delhi had petitioned against OFB taking the three actions listed in the show-cause notice on the grounds that there is breach of the NDA by the Singapore company as he argues that this has yet to be decided by arbitration proceedings.

The judgment in the court order rejected this notion though as it separated the NDA from any alleged corruption practice. ‘During the course of execution of a contract with the Government, if a party is alleged to have indulged in a corrupt practice, the said conduct may not only lead to the termination of the contract, which would be an action taken in terms of the contract, but would also entitle the Government to take action against such a party … This alleged conduct falls outside the realm of the contractual obligations of the parties.’

KINETICS BLACKLISTED IN INDIA

•ST Kinetics blacklisted in India

•STE maintains innocence

•No financial impact

India’s bribery scandal

ST Engineering (STE) yesterday morning halted trading of its shares and also put out an announcement in response to a bribery scandal in India. According to an Aviation Week story dated 5 Mar 2012, the Indian Ministry of Defence (MoD) has blacklisted six defence firms, including STE’s subsidiary ST Kinetics (STK), from doing business in India over the next 10 years. The MoD’s decision was based on evidence related to illegal gratification to officials, including Sudipto Ghosh, the former Director General of India’s Ordnance Factory Board (OFB).

STE maintains innocence

In its announcement yesterday, STE maintains it is a law-abiding group and will now seek legal advice so as to clear its name of any shenanigan. Furthermore, despite media reports of the blacklisting, STK has not received any official notification from the Indian authorities on this matter. In fact, in all the previous court hearings and affidavits filed, the MoD repeatedly said STK was only temporarily suspended, but not blacklisted, as an arms vendor to India. The court hearings were the result of three petitions STE filed with the Delhi High Court in Mar 2011 to seek clarification on the alleged blacklisting.

No financial impact

According to STE, STK has never won any defence contract or exported defence sales to India. STE also understands that developing defence sales to India will be a long process and has not included any expected sales to India’s MoD in its FY12 guidance. Thus, the group expects this blacklisting to have no financial impact on the group’s financial performance and maintains its FY12 guidance.

Maintain BUY

Since this matter has no financial impact on STE, coupled with STE’s vigorous insistence of its innocence, we maintain our BUY rating and fair value estimate of S$3.32/share on STE.

KINETICS BLACKLISTED IN INDIA

•ST Kinetics blacklisted in India

•STE maintains innocence

•No financial impact

India’s bribery scandal

ST Engineering (STE) yesterday morning halted trading of its shares and also put out an announcement in response to a bribery scandal in India. According to an Aviation Week story dated 5 Mar 2012, the Indian Ministry of Defence (MoD) has blacklisted six defence firms, including STE’s subsidiary ST Kinetics (STK), from doing business in India over the next 10 years. The MoD’s decision was based on evidence related to illegal gratification to officials, including Sudipto Ghosh, the former Director General of India’s Ordnance Factory Board (OFB).

STE maintains innocence

In its announcement yesterday, STE maintains it is a law-abiding group and will now seek legal advice so as to clear its name of any shenanigan. Furthermore, despite media reports of the blacklisting, STK has not received any official notification from the Indian authorities on this matter. In fact, in all the previous court hearings and affidavits filed, the MoD repeatedly said STK was only temporarily suspended, but not blacklisted, as an arms vendor to India. The court hearings were the result of three petitions STE filed with the Delhi High Court in Mar 2011 to seek clarification on the alleged blacklisting.

No financial impact

According to STE, STK has never won any defence contract or exported defence sales to India. STE also understands that developing defence sales to India will be a long process and has not included any expected sales to India’s MoD in its FY12 guidance. Thus, the group expects this blacklisting to have no financial impact on the group’s financial performance and maintains its FY12 guidance.

Maintain BUY

Since this matter has no financial impact on STE, coupled with STE’s vigorous insistence of its innocence, we maintain our BUY rating and fair value estimate of S$3.32/share on STE.

NEAR MISS WITH POSITIVE OUTLOOK

•FY11 revenue flat; PATMI up 7%

•Robust order book of S$12.3b

•12.5 cent dividend payout

Lower revenue but higher PATMI

ST Engineering (STE) 4Q11 revenue fell 5% YoY to S$1.5b but PATMI edged 2% higher to S$152m. The 4Q11 PATMI gain was primarily driven by two factors – 1) a total of S$10m of one-off losses in 4Q10 and 2) a lower tax rate of 16% in 4Q11, compared to the 23% tax rate in 4Q10. For the full year, STE’s FY11 revenue remained flat at a tad shy of S$6b while PATMI grew 7% to S$528m, missing consensus revenue and PATMI estimates by 8% and 4% respectively. On a more positive note, STE disclosed a robust order book of S$12.3b at end-FY11 and announced a total dividend payout of 12.5 cents/share, which represents a 90% dividend payout ratio for FY11. The dividend payout is made up of a final dividend of 4 cents/share and a special dividend of 8.5 cents/share.

Segmental contribution

In terms of revenue contribution from the different segments in 4Q11, Aerospace grew a strong 14% YoY to S$503m, Electronics gained 8% to S$408m, Land Systems remained flat at $465m, while Marine plunged 68% to S$91m. Management clarified that STE’s Marine segment was hit by a one-time S$176m reversal of revenue, which was the result of the termination of a shipbuilding contract for a Ropax ferry with Louis Dreyfus Armateurs announced during 4Q11. Land Systems was the star segment in pre-tax profit growth recording a 27% YoY jump to S$37m, while Marine edged 1% higher to S$38m. However, Aerospace pre-tax profit fell sharply by 19% to S$71m and Electronics eased 2% to S$33m.

Maintain BUY with higher S$3.32 fair value

At last night’s results briefing, management guided for both revenue and pre-tax profit growth in FY12, barring unforeseen circumstances. Compared to our previous fair value estimate of S$3.01/share, based on an 18.5x P/E multiple, we now peg our estimate of STE’s FY12 EPS to its historical average forward P/E multiple of 19x to arrive at a fair value of S$3.32/share. Maintain BUY.