ST Engg shares hold steady after news of exec’s arrest

SHARES of ST Engineering escaped unscathed yesterday following news that a senior officer, as well as some current and former employees, had been arrested over investigations into falsified accounts.

The stock lost just one cent or 0.35 per cent yesterday to finish at $2.83, with some 1.77 million shares changing hands.

By comparison, the Straits Times Index yesterday closed down 0.52 per cent, or down 14.21 points.

ST Engineering said on Monday that Patrick Lee Swee Ching, former group financial controller at ST Marine, two existing staffers and an ex-employee have been arrested by the Corrupt Practices Investigation Bureau (CPIB).

Mr Lee was arrested over an offence under Section 477A of the Penal Code, Chapter 224, which relates to an officer who destroys or falsifies documents ‘wilfully and with intent to defraud’.

Mr Lee was with ST Marine between 2001 and 2006, and joined VT Systems in November 2006.

ST Engineering added that it is believed that the CPIB is investigating certain transactions involving former and current employees of ST Marine.

The two current employees and one former employee of ST Marine arrested have also been released on bail.

These individuals do not hold key management appointments in ST Engineering, the company said.

Mr Lee, now chief financial officer of ST Engineering’s US division, Vision Technologies Systems (VT Systems), was arrested last Thursday. He returned to the US two days after the CPIB arrested him, after the bureau granted him permission to leave the country, and is still chief financial officer at VT Systems.

He has also not been charged in court.

‘Not often do we see a senior manager at a subsidiary of one of the largest listed conglomerates in town arrested but granted bail and allowed to leave Singapore,’ Kim Eng said in a client note yesterday. ‘As Alice would say, curiouser and curiouser.’

Separately, ST Engineering said yesterday that its land systems arm, ST Kinetics, has won a $68 million contract from Singapore’s Ministry of Defence.

The contract, won through an international tender, is to supply Spider Light Strike Vehicles (Spider LSV) and spares. These vehicles are designed such that weapon systems can be mounted on both sides of the driver.

ST Engineering expects to deliver the vehicles between 2013 and 2014.

Senior ST Engineering exec nabbed in CPIB probe

Former ST Marine financial controller is now out on bail

A senior executive of Singapore Technologies Engineering, as well as former and current employees of the company, have been hauled up by the anti-corruption bureau over investigations into falsified accounts linked to the company’s marine services division.

Patrick Lee Swee Ching, former group financial controller at Singapore Technologies Marine (ST Marine), two existing staffers and an ex-employee have been arrested by the Corrupt Practices Investigation Bureau (CPIB), ST Engineering said in a press release yesterday. All four have been released on bail.

Mr Lee, now chief financial officer of ST Engineering’s US division, Vision Technologies Systems (VT Systems), was arrested last Thursday for an offence under Section 477A of the Penal Code, Chapter 224. The offence relates to an officer who destroys or falsifies documents ‘wilfully and with intent to defraud’. Mr Lee has not been charged in court.

No details were provided on the type of accounts that were being investigated or the date of the alleged offence. Mr Lee was with ST Marine between 2001 and 2006, and joined VT Systems in November 2006.

He returned to the US on Sept 10 – two days after the CPIB arrested him – after the bureau granted him permission to leave the country. He is still chief financial officer at VT Systems.

‘We are aware that two current employees and one former employee of ST Marine have also been arrested by the CPIB and released on bail. These employees do not hold key management appointments in the ST Engineering group,’ said ST Engineering.

The company has also launched an internal inquiry into the matter, it added. ‘We will take appropriate action as necessary after the inquiry has been completed and we have reviewed the findings.’

Mr Lee has been with ST Engineering since 1996. He started as group financial controller in the aerospace sector before moving to ST Marine five years later. Prior to that, he spent 11 years with ExxonMobil, and three years as an auditor at Ernst & Young.

The father of three graduated from Raffles Institution and is a Certified Public Accountant.

ST Marine provides shipbuilding services to customers that include the US Navy. Its shipbuilding contracts with the US Navy are won through its US shipyard unit, VT Halter Marine, which is in turn held through VT Systems.

Those found guilty under Section 477A of the Penal Code may be imprisoned for up to 10 years, ordered to pay a fine, or both.

ST Engineering posted a net profit of $130.5 million for the second quarter ended June, up 5 per cent from a year ago, despite a fall in revenue of 2 per cent to $1.48 billion.

The results were dragged down by the US dollar’s depreciation against the Singapore currency.

Amid a broad market selldown, ST Engineering shares lost 3.07 per cent or nine cents to end at $2.84 yesterday.

Resilient Earnings

Management confident of a stronger 2H11. We recently caught up with the management of Singapore Technologies Engineering Ltd (STE) to get an update on the group. STE historically has a stronger second half of the year, compared to the first half. Barring unforeseen circumstances, management is confident this will also be the case in 2H11. With STE’s 1H11 net earnings meeting 47.4% of our FY11 estimates, STE looks on track to meet our FY11 expectations, despite a weakening US$.

Earnings model fine-tuned. Nevertheless, our earnings model has been fine-tuned to further segregate STE’s four main segments into their respective sub-segments for greater granularity. (See Exhibits 1 to 5 for a graphical representation of the revenue and pre-tax profit contribution of STE’s four main segments and the respective sub-segments.) Despite this fine-tuning exercise, we have maintained our FY11 earnings estimate of STE at S$510m.

Risks and downside protection. Equity markets around the world have seen higher volatility in recent weeks and talks of the global economy heading for a recession is gathering pace, as investors are more unsure about the near-term outlook. During the equity sell-off in early 2009 caused by the global financial crisis, STE’s implied forward P/E fell by more than two standard deviations below its historical average. However, STE’s earnings are resilient in nature. STE has 1) a large stable stream of revenue coming from government-related projects; 2) a strong order book and a sizeable chunk of its non-government business under long-term contracts; and 3) a profitable and extremely cash generative business model. Furthermore, STE’s 90% dividend payout policy gives it a high dividend yield of 5.1%. These four factors collectively provide good downside protection, making STE a good name to own if one wants to stay invested in equities. At the current price of S$2.95, STE is priced at 17.0x P/E based on our earnings estimates over the next four quarters. This means STE is already trading at more than one standard deviation below its historical average forward P/E of 19.4x. (See Exhibit 6 for STE’s historical average forward P/E.)

Maintain BUY. Given STE’s resilient earnings, we used its historical average forward P/E of 19.4x against its net earnings estimates over the next four quarters to arrive at a fair value of S$3.37 per share, down from S$3.58 previously. As the new fair value still represents 14.2% upside, we maintain our BUY call.

Protect your portfolio!

• Protect your portfolio! This should be the best time to buy STE for its defensive quality in the face of volatile markets. Indeed, its share price has outperformed the market by 11% in the last three months. With little room for sharp depreciation in the US$, we are hanging on to hopes of earnings surprises, which we believe can offer re-rating catalysts. Consensus expects the US$/S$ to hover at S$1.18-1.20 into 2012, which would have a negligible (1% or S$6m) impact on STE’s PBT in the worst case. In fact, we believe current valuations of 15x CY12 P/E (below its average trading band of 16x during the previous crisis) have priced in fears of US$ deterioration and macro uncertainties. No change to our earnings estimates, target price of S$3.61 (still based on blended P/E, DCF and dividend yields).

• Zero order-book risk. Unlike its conglomerate peers with substantial exposure to the offshore & marine space, STE’s order book (S$10.8bn) is secure with almost zero risk of cancellations as 40-50% of its contracts are defence-related. Commercial contracts are mostly from long-term customers with strong financials including Fedex, American Airlines and Japanese airlines. STE has also been chalking up orders from all segments worth about S$1.5bn YTD.

• MRO recovery intact. More than 1,500 narrow-body aircraft (delivered in 2009-2010) could be scheduled for “C” checks (18-24-month cycle) starting 2H11, affirming our view that the MRO recovery is on track.

• High yields and cash-rich. STE offers a safe refuge with its fairly attractive dividend yields of about 6%, only slightly lower than the 7% from telcos and REITs. The yield is also backed by a solid balance sheet as it continues to generate net cash (S$220m as of 1H11). It is also one of two companies in Singapore with an AAA rating (the other being Temasek) from Moody’s.

Warthog keeping Taliban at bay

Vehicle’s success has led to a rethink on British tactics in Afghanistan

EVEN as hardware made by Singapore Technologies Engineering (STE) were put through their paces by the Singapore Armed Forces (SAF) at the National Day Parade yesterday, a tracked fighting carrier made by the group has continued to win battlefield accolades in the service of British forces.

In a report last Friday, The (London) Telegraph highlighted the success of the Warthog, a 22-ton tracked armoured vehicle whose off-road ability allows it to frequently outflank the fleet-footed Taliban in Afghanistan. The vehicle’s success has led to a rethink on British tactics as it is not only able to deliver troops and supplies, it can also bring down heavy firepower from unexpected directions, the paper said.

The Warthog, a variant of the Bronco which is used by the SAF, can carry up to a dozen soldiers who can be deployed either to fight insurgents or engage with the local population to build up an intelligence picture of tribal communities.

‘It has almost certainly saved lives after 11 Warthogs were hit in one tour by large IEDs (Improvised Explosive Device) without anyone inside being killed although two were badly wounded,’ The Telegraph reported. The Warthog has also proved adept at being able to drive through the notoriously difficult terrain of Helmand province’s irrigated ‘green zone’.

In one epic six-week-long battle earlier this year, the vehicles provided a perimeter defence for the Royal Engineers as they laid a key road in central Helmand called Route Trident. With heavy weaponry such as heavy machine guns and grenade launchers, the Warthogs kept the Taliban at bay.

‘You can put Warthog into places you would not dream of with other armoured vehicles as it has very low ground pressure giving us the ability to move around the battlespace in a completely different way,’ Major James Cameron, the 2nd Royal Tank Regiment squadron commander, the first to use the vehicle on operations, was quoted as saying. ‘We have been able to manoeuvre in an extraordinary way. Literally we can go over ditches, swim rivers or go up ravines getting right in behind the enemy where they least expect us. We run on them at speed and before they know anything about it we are right on top of them.’

Towards the end of the unit’s six-month tour, radio intelligence showed that Taliban commanders were warning their men, ‘Don’t fire at the tank’.

The Warthog was first introduced to the British forces in 2009. It was the first armoured vehicle to be built for a Western army by an Asian company. When ST Kinetics, the land division of STE, won a £150 million contract for 115 vehicles from the British, it represented a major breakthrough for the Singapore company.

STE produced the first Warthog within nine months of the order, on time and ahead of schedule although there was a delay of several months as the armour protection was improved. The Warthog was ordered to replace the BAE Systems’ Viking, which is being withdrawn from service after almost a quarter of the fleet was destroyed by Taliban bombs.

STE beat BAE Systems, which had offered a Viking II variant, to the British contract.