ST Engineering - Divesting Loss-Making US Marine Business
- ST Engineering announced (on 07 Nov 2022) that it will be completely exiting its US marine business via the sale of its wholly-owned subsidiaries (VT Halter Marine and ST Engineering Halter Marine and Offshore) to US shipbuilder Bollinger Shipyards Lockport.
- ST Engineering’s marine business runs a deep-water shipyard located in Pascagoula, Mississippi; key business activities include the design and construction of ships, barges, and rigs. The purchase consideration is US$15m (~S$21m) on a cash-free, debt-free basis. In addition, ST Engineering is eligible for earn-out payments, which depend on the award of certain future shipbuilding contracts (to VT Halter Marine) and the operating profit margin of these contracts. Assuming these criteria are met, ST Engineering will receive up to US$10.25m (~S$14.5m).
- The divestment is expected to be completed by end-Dec 22; upon completion, ST Engineering will book a one-off loss on disposal of ~S$13.3m.
- The rationale for the divestment is for ST Engineering to focus more on its higher-margin businesses. Since FY17, the group’s US marine subsidiaries have incurred annual pre-tax losses of US$40m-60m (~S$56m-85m); this indicates net losses of US$32m-47m (~S$45m-66m), assuming a corporate tax rate of 21%.
- We view the disposal as positive for ST Engineering and see potential for margin uplift in FY23-24F. After accounting for S$1.9bn in order book reduction (from US marine business), ST Engineering’s order book remain ed at a record high of S$23.1bn as of end-Sep 22 (vs. 1H22: S$22.2bn).
- We lower our FY23-24F marine revenue forecast by 32% (assuming ~S$250m in annual revenue reduction) but raise FY23-24F defence segment operating profit margin forecast to 12.0-12.3% (vs. 10.5-10.8% previously) on account of reduced earnings drag. With our new assumptions, our FY23-24F EPS forecast for ST Engineering is raised 4-5%.
- Our target price for ST Engineering is lifted to S$3.99, still based on blended valuations (P/E, DCF, and dividend yield).
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
LIM Siew Khee CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2022-11-07 2022-11-07
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