ST Engineering
SINGAPORE TECH ENGINEERING LTD
S63.SI
ST Engineering (STE SP) - Rise Of The Terrex
- STE has announced the formal award of a contract for 13 prototypes of the amphibious combat vehicle Terrex 2 by the US Marine Corps.
- Upon evaluation next year, STE could secure a much larger contract worth US$1.3b.
- In addition, not only is the award a testament to Terrex 2’s capabilities, it could also be a prelude to further contract wins, especially within Australia.
- Maintain BUY, with a revised target price of S$3.60.
WHAT’S NEW
ST Engineering (STE) and partner Science Applications International Corp (SAIC) formally awarded US$121.5m contract by the US Marine Corps.
- The contract involves the building of 13 prototypes of the amphibious combat vehicle, Terrex 2.
- The contract is for the initial, engineering, manufacturing and development phase of the contract.
If selected, SAIC could secure a much larger contract for 204 vehicles worth up to US$1.3b.
- The 13 prototypes would be evaluated next year. Should the US Marines select Terrex 2, a further contract would be awarded for the building of another 204 vehicles at an average procurement price of up to US$6.5m per vehicle.
BAE Systems offers a similar amphibious system, with similar specs.
- BAE Systems has tied up with Italian firm, Iveco Defence vehicles. Named Iveco SuperAV, it has secured an order from the Brazilian Army.
- During the tenders for the US Marines contract, STE was one of the two firms selected to build prototypes. The other firm was BAE Systems, which was awarded a smaller US$103.8m contract for the SuperAV vehicles.
STOCK IMPACT
Significant in-road to US Military procurement could pave the way for further contract wins.
- This would be STE’s most significant contract win with the US Marines to date. The award is a testament of Terrex 2’s capabilities and could pave the way for further contracts, especially within Australia.
- ST Kinetics, together with partner Elbit Systems, is bidding for Australia Department of Defence’s renewal of armoured combat vehicles (Project Land 400 Phase 2) for a 200+ vehicle order. Named Sentinel II, the land-based vehicle is built around the Terrex.
- An award is expected in March.
EARNINGS REVISION/RISK
- No earnings revision.
VALUATION/RECOMMENDATION
Maintain BUY but raise our target price by 9.8%.
- We had earlier valued STE at 15- year mean PE multiple of 19.4x on 2016’s earnings.
- We now accord STE a 10% premium to the earlier PE multiple and value the stock at 21.4x 2016F earnings and derive a fair value of S$3.60.
- At our target price, STE will a trading at dividend yield of 3.7%.
SHARE PRICE CATALYST
- More contract wins.
K Ajith
UOB Kay Hian
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Sophie Leong
UOB Kay Hian
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http://research.uobkayhian.com/
2016-03-18
UOB Kay Hian
SGX Stock
Analyst Report
3.60
Up
3.28
