ST Engineering - RHB Invest 2022-11-09: Mildly Positive On US Marine Business Sale; BUY


ST Engineering - Mildly Positive On US Marine Business Sale; BUY

  • ST Engineering (SGX:S63) has decided to dispose of its loss-making US marine business. While orders for this unit account for ~8% of its total orderbook, outstanding jobs excluding these contracts still provide over two years of revenue visibility.
  • We expect the margin improvement in its defense business to more than offset the revenue decline from this sale.
  • Beyond 2022, ST Engineering should deliver a 10% profit CAGR in 2022–2024F, and a steady dividend of S$0.16.

US marine business exit deal.

  • See ST Engineering's announcement dated 07 Nov 2022 – ST Engineering plans to divest its entire stakes in VT Halter Marine (VTHM) and ST Engineering Halter Marine and Offshore to Bollinger Shipyards Lockport for a cash consideration of US$15m (~S$21m) on a cash-free, debt-free basis – subject to net working capital adjustments, if any, post-closing.
  • ST Engineering may receive earn-out payments of up to US$10.25m, subject to the award of certain future shipbuilding contracts to VTHM, and such contracts meeting the requisite operating profit margins.
  • The proposed divestment is expected to be completed before the end of Dec 2022, and translate into a non-cash loss on disposal of ~S$13.3m.

ST Engineering’s US marine business has been in the red.

  • ST Engineering noted that it had conducted a thorough review of the two US marine businesses. These two units have incurred a combined pre-tax net loss of US$256m (S$349m) in the last five years (2017-2021), with an annual pre-tax net loss that ranged from about US$40m (~S$56m) to US$60m (~S$85m).

Reduction in the orderbook, but this may be positive for the margin outlook.

  • ST Engineering’s outstanding orderbook remains strong at S$25bn at the end of Sep 2022. This includes the orders for the two US marine businesses worth S$1.9bn, which will be removed from its orderbook after the close of the transaction. Excluding these orders, the group’s outstanding orderbook of S$23.1bn still provides over two years of revenue visibility.
  • We expect a sharp drop in ST Engineering's marine business revenue from 2023, but expect the improvement in defense business margins (due to the sale of the loss-making US marine businesses) to more than offset the revenue decline.

Strong earnings growth beyond 2022.

Shekhar Jaiswal RHB Securities Research | https://www.rhbgroup.com/ 2022-11-09
SGX Stock Analyst Report BUY MAINTAIN BUY 4.15 UP 4.100