SINGAPORE TECH ENGINEERING LTD (SGX:S63)
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.
- We increase 2024F earnings forecast for ST Engineering by 3%, and maintain that the delivery of ST Engineering’s strong orderbook, growing defence revenue and Urban Solutions & Satcom Security’s potentially sharp recovery should support its 14-17% profit growth in 2023-2024F.
- We continue to derive our target price for ST Engineering by using an average of P/E, P/BV, EV/EBITDA, and DCF of FCF. Our target price for ST Engineering includes an ESG premium of 8%, over the fair value of S$3.85.
- See
- Maintain BUY recommendation on ST Engineering with new S$4.15 target price from S$4.10, 25% upside with ~4% FY23F yield.
Shekhar Jaiswal
RHB Securities Research
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https://www.rhbgroup.com/
2022-11-09
SGX Stock
Analyst Report
4.15
UP
4.100
