ST Engineering - UOB Kay Hian 2016-03-18: Rise Of The Terrex

ST Engineering - UOB Kay Hian 2016-03-18: Rise Of The Terrex 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 | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-18
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.60 Up 3.28


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