ST Engg lands $441m supply vessel job

ST Engineering’s US shipyard, VT Halter Marine, has secured a shipbuilding contract worth $441 million from New York-listed Hornbeck Offshore Services Inc.

Under the contract, VT Halter will construct eight 97.2 metre long offshore supply vessels (OSV) – the Super 320 – with options for up to 24 more, the company said yesterday.

The Super 320 design is an enlarged version of the 88-metre platform supply vessel, HOS Coral, which VT Halter delivered to Hornbeck in March 2009.

Particular attention to stringent regulations for environmental stewardship was given to the design of Super 320, which VT Halter had developed for Hornbeck.

The OSVs will include a double-hull that eliminates any fuel storage adjacent to the sideshell, and propulsion machinery that meets the requirements of EPA Tier 3 for stack emissions.

It will have about 20,900 barrels of liquid mud carrying capability, 1,102 square metres of deck area and a fire-fighting class notation.

These vessels will be constructed in VT Halter’s yards at Moss Point Marine and Halter Moss Point in Mississippi.

Construction of the first vessel is expected to commence in the first quarter of 2012 while engineering work has already begun.

Deliveries of the first and eighth vessels are planned for October 2013 and September 2014 respectively.

The first option for the additional vessels is required to be exercised by September 2012 and may be exercised individually or in a series.

Delivery dates for option vessels are about 26 months following the option exercise.

Lower S$3.01 fair value on more muted 2011 outlook

Lower revenue but higher PATMI. Singapore Technologies Engineering (STE) 3Q11 revenue fell 6.2% YoY to S$1.4b but PATMI edged 2.7% higher to S$133.8m. The PATMI gain was the result of total one-off gains of S$5.3m, compared to oneoff losses of S$6.9m in 3Q11. For 9M11, revenue increased by 1.8% to S$4.45b and PATMI is up 9.8% to S$375.4m. 9M11 revenue met 71.3% and 71.8% of consensus and our 2011 respective revenue estimate, while 9M11 PATMI reached 71.1% of consensus and 73.6% of our 2011 PATMI estimate.

Segmental contributions. STE’s 3Q11 segmental revenue breakdown saw Aerospace eased 4.7% YoY to S$463.7m, Electronics fell 7.8% to S$311.2m, Land Systems dropped 16.6% to S$306.8m, while Marine gained 0.2% to S$254.8m, and Others surged 40.6% to S$58.1m. Management explained that the bigger-than-expected fall in Land Systems revenue was due to earlier forecasted revenue targets being adversely impacted by the uncertain economic conditions and the delay in some projects. On the pre-tax profit line, Electronics and Aerospace segments were the stars, with their pre-tax profit gaining 10.3% and 9.8% to S$37.6m and S$73.8m respectively; but Land Systems segment recorded pre-tax profit of S$12.3m, or 54.6% lower than a year ago.

Management lowered 2011 guidance. At last Friday’s results briefing, management warned of uncertainties arising from (1) the sovereign debt issue in Europe, (2) the slowing American economy, and (3) unrest in the Middle East and North Africa. Management also lowered its guidance for 2011 revenue and pre-tax profit to be comparable to 2010 versus higher revenue and pre-tax profit previously. Nevertheless, order book remained healthy at S$11b, up from S$10.8b at end-2Q11. Incorporating management’s latest guidance into our earnings model, we have lowered our 2011 revenue and PATMI estimate by 2.4% and 1.3% to S$6.05b and S$503.2m respectively.

Maintain BUY with lower S$3.01 fair value. Given the uncertain global economic outlook and management watering down its guidance, we decided to use a lower forward P/E multiple to price STE. Instead of the 19.4x average forward P/E previously, we now use 18.5x, or half a standard deviation below its historical average, against STE’s EPS estimates over the next four quarters to arrive at a fair value of S$3.01, down from S$3.37 previously; but we maintain our BUY rating on STE.

ST Engg Q3 profit rises 2.7% to $133.8m

Revenue slides 6.2% to $1.39b; EPS rises to 4.39 cents

SINGAPORE Technologies Engineering (ST Engineering) chalked up a 2.7 per cent rise in third-quarter net profit to $133.8 million, from $130.2 million a year ago, despite a fall in revenue.

The group’s revenue slid 6.2 per cent, from $1.49 billion to $1.39 billion, for the three months ended Sept 30, 2011. But gross profit margin rose as cost of sales fell 8.7 per cent.

Except for its marine sector which had comparable revenue, the rest of its sectors – aerospace, electronics, and land systems – registered lower revenue compared to Q3 2010.

For the nine months ended Sept 30, ST Engineering’s net profit attributable to shareholders rose 8.2 per cent year on year to $375.4 million, while revenue rose 1.8 per cent to $4.4 billion.

Earnings per share (EPS) for the group rose to 4.39 cents for Q3 2011, up from 4.31 cents a year ago.

No interim dividend was recommended for the quarter.

The group’s profit before tax (PBT) of $165.9 million in Q3 2011 was 3.8 per cent higher than Q3 2010’s PBT of $159.8 million.

All sectors recorded higher PBT except for Land Systems, where PBT dropped 46 per cent due to lower revenue and higher operating expenses. Aerospace posted a 20 per cent growth in PBT, mainly due to write-back of allowance for inventory obsolescence following the revised inventory allowance estimates, lower finance costs, and higher contribution from associates.

However, these were partially offset by higher administrative expenses.

ST Engineering had ‘revised the obsolescence rates to align more closely with the industry practices’. The effect of this change for its four sectors resulted in a write-back allowance for inventory obsolescence of $19 million to its income statement.

Electronics PBT in Q3 2011 increased 15 per cent thanks to favourable sales mix, better contribution from satellite communication product sales, and write-back of allowance for stock obsolescence. These were partially offset by the impairment in value of intangible assets and higher operating expenses.

Marine PBT improved 7 per cent, due to higher write-back allowance for doubtful debts and higher other income, but these were partially offset by lower gross profit due to unfavourable sales mix.

ST Engineering president and chief executive officer Tan Pheng Hock said: ‘The group continues to secure orders and grow its order backlog to $11 billion at the end of the quarter despite the challenging environment.’

‘Barring unforeseen circumstances, the group expects to achieve revenue and PBT for FY 2011 comparable to FY 2010.’

ST Engineering gained four cents to close at $2.85 yesterday, before its results were out.

ST Engg unit wins $125m DSTA contract

ST Engineering’s wholly owned integrated services arm ST Synthesis has secured a five-year contract worth about $125 million from Singapore’s Defence Science & Technology Agency (DSTA).

The contract, which begins this month, will see ST Synthesis provide facilities maintenance services to the Singapore Ministry of Defence (Mindef) controlled properties and facilities.

‘Security sensitivity, integrated, end-to-end operation and essential support capabilities offered on a 24/7 basis are of paramount importance in managing essential and intensive infrastructure of controlled properties and facilities,’ said Goh Lik Kok, general manager of ST Synthesis.

ST Synthesis, whose expertise includes preventive equipment maintenance and critical asset preservation, will provide maintenance services on the buildings’ infrastructure, mechanical and electrical equipment and systems for various properties including camps and military installations.

The mechanical and electrical equipment includes power generators, transformers and switchgears, electrical distribution systems, mechanical ventilation and airconditioning systems, lightning protection systems, earthing systems and fire alarms, and detection and protection systems as well as security surveillance and access control systems.

‘ST Synthesis is proud that we are able to leverage our expertise to provide comprehensive maintenance services to Mindef,’ said Mr Goh.

ST Synthesis has substantial experience in handling key installations and managing security sensitive complexes, infrastructures and facilities in Singapore.

Its maintenance contracts include the $6.5 million management and maintenance of essential equipment for Tuas Marine Transfer Station and Semakau Landfill, awarded by the National Environment Agency in January 2010.

The company was also awarded in July 2009 the $26.5 million Land Transport Authority contract for the comprehensive maintenance of Kallang Paya Lebar Expressway.

Right on track

Small but meaningful acquisition. Singapore Technologies Engineering Ltd (STE) announced on 20 Sep 2011 that its American subsidiary Vision Technologies Aerospace Inc. agreed to wholly acquire DRB Aviation Consultants, Inc. (DRB Aviation) for US$1.45m (~S$1.75m). Apart from strengthening STE’s cabin interior engineering capability, DRB Aviation is a Federal Aviation Administration (FAA – the American aviation authority) designee in issuing minor Supplementary Type Certificates (STCs) for avionics and interiors projects. While it is possible for STE to develop this FAA designation in-house, management reckons this acquisition is both faster and more cost effective. Alterations to an aircraft’s certified layout require an approved STC and STE used to outsource STC certification of its aviation cabin engineering projects. With this acquisition,

the STC certification process could be done within the STE Group.

S$68m contract win from MINDEF. STE announced on 13 Sep 2011 that its subsidiary ST Kinetics won a S$68m contract from the Singapore Ministry of Defence (MINDEF) to supply its new generation of Spider Light Strike Vehicles (Spider LSV). Delivery is expected to take place over 2013-14. While the contract value is small relative to the size of a conglomerate like STE, this contract win illustrates STE’s ability to continue developing new products.

CPIB investigations. STE announced on 12 Sep 2011, that Patrick Lee, the CFO of the holding company of the group’s American business interests, Vision Technologies Systems, Inc. (VT Systems), was arrested by Singapore’s Corrupt Practices Investigation Bureau (CPIB). Lee was not charged in court, subsequently released on bail and granted permission by the CPIB to leave Singapore. STE believes this is in relation to certain transactions that happened when Lee was the financial controller at ST Marine. Since then, Lee has taken a leave of absence while the CPIB’s investigations and STE’s internal inquiry continue. STE Group’s financial controller Raphael Chin has been appointed as acting CFO of VT Systems. Management believes this arrangement will not have any material impact on the operations of the STE Group.

Maintain BUY. Since our last report on 9 Sep 2011, the FTSE Straits Times Index has fallen 5.5% to 2,701 points. During the same time, STE displayed its defensive nature as its share price only fell slightly by 0.3%.. Given STE’s strong order book of S$10.8b, its 90% dividend payout ratio and that recent news developments do not have a material impact on STE’s resilient earnings, we retain our fair value estimate of S$3.37 per share. As the fair value still represents 14.6% upside to our fair value, we maintain our BUY call.