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ST Engg’s US shipyard wins $185m contract

ST Engineering’s shipyard in the United States – VT Halter Marine – has been awarded a shipbuilding contract worth about $185 million by Honolulu-based Pasha Hawaii to build a roll-on/roll-off car truck carrier.

On top of that, the shipyard also signed an option agreement to construct a second vessel with some scope variation for a base price of about $175 million.

Work on the car truck carrier that was ordered will start immediately and the ship is expected to be delivered in the second half of 2013. The ship will ply the Hawaii and US West Coast trade as a weekly service.

This is the second such carrier built by VT Halter Marine for Pasha Hawaii.

‘Building a second ship has always been part of our organisation’s plan. The level of enthusiasm and customer support we received when we deployed our first vessel was well beyond our expectations,’ said George Pasha IV, the chief executive officer of Pasha Hawaii.

‘Our second vessel will both better serve the Hawaii/mainland market and also provide increased frequency and superior reliability. A weekly sailing will also allow us to present even more tailored transportation solutions to our clients.’

The contract for the first vessel, the MV Jean Anne, was awarded to the yard in 2003 and entered service in March 2005. It was designated ‘Ship of the Year’ by American Ship Review in her first year of service.

‘This contract is an extremely important one for our US operations as it reflects VT Halter Marine’s strong credibility and track record among its customers,’ said Ng Sing Chan, president of ST Marine, the marine arm of ST Engineering. The contract is not expected to have any material impact on the per-share consolidated net tangible assets and earnings of ST Engineering for the current financial year.

Event

While ST Engineering’s (STE) headline FY10 earnings of $491m were above our forecasts, this was actually slightly below our core expectations, as STE derived a gain through a change in its depreciation policy. Nevertheless, earnings were generally resilient. STE declared a final and special dividend totaling 11.55cts for a full‐year payout of 90% of earnings. FY11F PER stands at 17.1x, which is fairly valued in our opinion. We maintain our target price of $3.15 and HOLD recommendation.

Our View

• STE reviewed its depreciation policy for its property, plant and equipment during the quarter. Based on the recommendation of independent consultants, it broadly extended the useful life of its operating assets and buildings. This move effectively reduced FY10 depreciation by $39.5m.

• Combined with the interim dividend of 3cts, FY10’s full‐year dividend per share was 14.55cts. This amounts to a 90% payout ratio. Although we were optimistic that STE would resume its 100% payout, management has maintained this more prudent ratio as a buffer against future potential foreign exchange translation losses, which eroded FY10 earnings by around $11m.

• Management sees better PBT for all business segments in FY11. However, we are optimistic that the aerospace division may see an even stronger recovery, trickling down from improving operations in the US and global aviation market. STE’s total orderbook currently stands at $11.5b, versus $10.3b at end‐2009. It expects to convert about $3.7b of this in FY11.

Action & Recommendation

We raise our FY11 and FY12 forecasts by 4% and 6%, respectively, solely due to the change in its depreciation policy. Despite our HOLD rating, forward dividend yield of 5.3% is still attractive, and assumes a continuation of the 90% payout ratio.

FY10 above our expectations; Strongest quarter since recession

•Revenue increased by 7.9% to S$5.98bn, PATMI increased 10.6% to S$491mn

•Above our expectations as STE reports the strongest quarterly post-recession results

•Top line growth across all business segments except Aerospace

•Strong order book of S$11.5bn; Positive guidance for 2011

•Maintain Buy recommendation with revised target price of S$3.80

FY10 results discussion. The result for STE was above our expectations. Revenue growth of 7.9% would have been c.S$30mn higher if adjusted to account for unfavorable forex (weakening of the € and US$). There is a significant change to the depreciation policy for the Group that contributed to a 9.8% increase in Gross Profit. Consequently, PATMI surged 10.6% to S$491mn. Dividends of 11.55cents (Final: 4.00+ Special: 7.55) will be proposed by the management.

Management Guidance. STE typically provides guidance for up to 12months in advance. The company expects to deliver S$3.7bn of their S$11.5bn order book in FY11 and guidance provided demonstrated management optimism for FY11. For the Aerospace sector, revenue is expected to be comparable to that of FY10, while PBT is expected to be higher. This guidance is fairly conservative in our view as we expect stronger growth in the Aerospace business, following strong capacity growth in the aviation industry. Part of the reason for this conservative guidance is due to a significant depreciation of the US$ over the past year. As majority of the aviation contracts are denominated in US$, a further weakening of the US$ would result in translational forex loss when converted into S$. For the rest of the business segments, management expects higher revenue and PBT as compared to FY10.

Risks. Further weakening of US$ & € against S$; Slow down in capacity added by commercial customers; Rise in interest rates could reduce attractiveness of STE’s dividend yield; Greater risk appetite by investors could reduce demand for low beta stocks.

FY10 above our expectations; Strongest quarter since recession

•Revenue increased by 7.9% to S$5.98bn, PATMI increased 10.6% to S$491mn

•Above our expectations as STE reports the strongest quarterly post-recession results

•Top line growth across all business segments except Aerospace

•Strong order book of S$11.5bn; Positive guidance for 2011

•Maintain Buy recommendation with revised target price of S$3.80

FY10 results discussion. The result for STE was above our expectations. Revenue growth of 7.9% would have been c.S$30mn higher if adjusted to account for unfavorable forex (weakening of the € and US$). There is a significant change to the depreciation policy for the Group that contributed to a 9.8% increase in Gross Profit. Consequently, PATMI surged 10.6% to S$491mn. Dividends of 11.55cents (Final: 4.00+ Special: 7.55) will be proposed by the management.

Management Guidance. STE typically provides guidance for up to 12months in advance. The company expects to deliver S$3.7bn of their S$11.5bn order book in FY11 and guidance provided demonstrated management optimism for FY11. For the Aerospace sector, revenue is expected to be comparable to that of FY10, while PBT is expected to be higher. This guidance is fairly conservative in our view as we expect stronger growth in the Aerospace business, following strong capacity growth in the aviation industry. Part of the reason for this conservative guidance is due to a significant depreciation of the US$ over the past year. As majority of the aviation contracts are denominated in US$, a further weakening of the US$ would result in translational forex loss when converted into S$. For the rest of the business segments, management expects higher revenue and PBT as compared to FY10.

Risks. Further weakening of US$ & € against S$; Slow down in capacity added by commercial customers; Rise in interest rates could reduce attractiveness of STE’s dividend yield; Greater risk appetite by investors could reduce demand for low beta stocks.

ST Engg full-year net profit climbs 11%

Strong performance from all 4 business sectors; dividend of 11.55cts proposed

SINGAPORE Technologies Engineering (ST Engg) saw full-year net profit jump 11 per cent to $491 million from $443.9 million a year before, thanks to strong profit growth from all four business sectors – aerospace, electronics, land systems and marine.

Strong turnover growth from its land systems and marine sectors also lifted group revenue to $5.99 billion for the year ended Dec 31, 2010, 8 per cent up from $5.55 billion the year before.

Earnings per share thus grew 10 per cent to 16.21 cents, while net asset value rose from 52.09 cents at the end of FY09 to 53.38 cents as at end FY10. The group’s economic value added rose 21 per cent to $369.7 million.

ST Engineering’s board yesterday proposed a final dividend of 11.55 cents a share – made up of an ordinary dividend of 4 cents and a special dividend of 7.55 cents.

This means, adding the interim dividend of 3 cents a share paid in September 2010, a full year dividend of 14.55 cents – a yield of 4.36 per cent based on the average closing share price of the last trading day of 2010 and 2009.

For the full year, commercial sales came up to $3.5 billion, or about 59 per cent of turnover for the group, which also supplies equipment to the Republic of Singapore Armed Forces and other military customers.

The group’s cash and cash equivalents and short- term investments totalled $1.79 billion, including advance payments from customers of $1.53 billion.

ST Engineering said yesterday that higher project deliveries and the sale of specialty vehicles under ST Kinetics led to a 29 per cent increase in land systems’ turnover. ST Marine, the other business arm to record significant turnover growth of 10 per cent, crossed the billion dollar mark for the first time on the back of increased shipbuilding, ship repair and engineering activities. Revenue growth fuelled double-digit rise in profit before tax for both sectors.

Though revenue from the aerospace sector was flat year-on-year, profit grew as depreciation and finance costs fell. The electronics sector, too, was significantly more profitable despite marginal revenue growth, thanks to a favourable sales mix.

President and CEO Tan Pheng Hock yesterday said that ST Engineering invested more than $300 million in new capabilities and capacity across the four sectors in 2010.

He added that its strong order book of $11.5 billion ‘provides good visibility of the group’s future revenue stream’. About $3.7 billion of these orders are expected to be delivered within this year.

Mr Tan expects the group to achieve higher turnover and profit before tax this financial year than in the last. Revenue growth is expected in all but the aerospace sector, but all four sectors are expected to notch up higher profit before tax in FY11, compared to FY10.

ST Engineering closed a cent lower at $3.15 before its results were announced yesterday.