ST Engineering - Maybank Kim Eng 2019-04-24: VT Halter Marine (VTHM) Breaks The Long Winter


ST Engineering - VT Halter Marine (VTHM) Breaks The Long Winter

Marine division wins significant US contract; BUY

  • SINGAPORE TECH ENGINEERING LTD (ST Engineering, SGX:S63)’s US subsidiary, VT Halter Marine (VTHM), announced a SGD1b shipbuilding contract from the US Navy with options up to SGD2.6b.
  • The contract is for a newbuild Polar Security Cutter (heavy icebreaker vessel) with options for another two ships. This comes after a prolonged icy spell of no material contract wins and likely signals a turnaround in fortune for the Marine division that has been struggling for a few years.
  • We lift FY21F profit forecast by 2% and Target Price by 1.5% to SGD4.30 from SGD4.25.

Outlook for ST Engineering’s fourth engine finally improving

  • ST Engineering’s Aerospace, Electronics and Land Systems divisions saw growth drivers fall in place in the past 6-8 quarters from a confluence of factors related to restructuring, acquisitions and some demand recovery. However prospects for the Marine division remained challenging due to the prolonged industry slump. This US Navy contract announcement, the single largest by VTHM in over a decade, should materially improve the division’s 3-5 year medium term growth outlook.
  • We believe the business is also well positioned for growth after a series of cost control and right-sizing measures as evidenced by the past four quarters of sequential pre-tax profit growth despite challenging conditions.
  • Another point to note is that VTHM is the prime contractor for the project; this could be the ‘breakthrough’ US defence related big project win that it has been pursuing for some time, but awards thus far have been relatively small.

Immediate impact will however be small

  • The first Polar Ice Cutter is due to be delivered in 2024 and options for the other two ships, if exercised, due in 2025 and 2027. Assuming a 36-40 month EPC period, we estimate material contributions to Marine division’s profits will only start in FY21F.
  • Also for now, we have assumed that the option for just one additional ship is exercised. See attached PDF report for details on the key assumptions and estimated contribution from Polar Security Cutter contract. 

The other positive this month – MRAS deal closed

  • After a few months of delays in securing regulatory approvals caused by the long US government shutdown in 4Q18, the MRAS acquisition was completed earlier this month and is now a 100% owned subsidiary of ST Engineering. We expect the entity should start contributing from 3Q19.
  • See our earlier note ST Engineering - Maybank Kim Eng 2018-09-17: A Big LEAP for details of this acquisition.

Neel Sinha Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-04-24
SGX Stock Analyst Report BUY MAINTAIN BUY 4.30 UP 4.250