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CGS-CIMB sees $25 bil order book for ST Engineering with MINDEF, Taiwan rail contracts

This is up from an order book of $23 billion as at end-December 2022.

ST Engineering (STE) S63 has sizeable defence contracts in the pipeline, with a Ministry of Defence (MINDEF) contract announced March 27 worth up to $1.8 billion, according to estimates by CGS-CIMB Research analysts Lim Siew Khee and Kenneth Tan.

In a March 27 note, Lim and Tan maintain “add” on STE with an unchanged target price of $4.00, which represents an upside of 10.2% against its last traded price of $3.63 on March 27.

STE’s subsidiary, ST Marine, has been awarded a contract by Singapore’s MINDEF for the detailed design and construction of six Multi-Role Combat Vessels (MRCVs) for the Republic of Singapore Navy (RSN). The vessels will be delivered progressively from 2028.


While no amount was disclosed, CGS-CIMB analysts estimate ST Marine’s share of contract price per vessel to be between $250 million and $300 million.

“This is benchmarked against ST Marine’s previous patrol vessels contract awarded in 2012 by Oman Navy at $880 million, or $220 million each,” say the analysts. “We also draw reference from the Abu Dhabi Ship Building contract from the UAE Ministry of Defence (MOD) in May 2021 to build four Falaj 3-class Offshore Patrol Vessels at US$950 million ($320 million each).”

ST Marine will also design and provide integrated logistics support engineering to support and maintain operational readiness during the lifespan of the MRCVs.

Lim and Tan also note that Singapore’s Defence Science and Technology Agency (DSTA) and Sweden’s Saab also signed a memorandum of understanding (MOU) last week to codevelop and design the MRCV, harnessing technologies such as AI and data analytics to realise the MRCV as a highly digital ship.

According to DSTA, the new MRCVs will replace the ageing Victory-class Missile Corvettes (MCVs), which have been in service since 1989. The MCVs formed the backbone of RSN’s strike and safeguard Singapore’s vital sea lines of communication.

'Good progress'

Lim and Tan notes that “all segments” of STE are making “good progress”.

On March 17, STE announced that its Urban Solution (USS) business won a turnkey rail service contract worth over $430 million from the Kaohsiung City Mass Rapid Transit Bureau for the new Kaohsiung MRT Red Line South Extension, as part of a larger consortium contractor, Hyundai Rotem.

The contract will start from mid-2023 for nine years.

This is in addition to its $1.4 billion turnkey contract secured in 2022 for the Kaohsiung MRT Yellow Line.

The contract started in 2022 and will last for 10 years.

On March 22, CFM International and STE’s Commercial Aerospace business signed a CFM Branded Service Agreement (CBSA) for LEAP-1A and LEAP-1B engines.

STE is the first Maintenance, Repair & Overhaul (MRO) provider in Asia to offer a full range of LEAP-1A and LEAP-1B services, notes Lim and Tan. “The CBSA expands STE’s capabilities as it has been a LEAP MRO network provider since 2020 for quick-turn services for the engines. Currently, more than 5,000 LEAP engines, powering A320neo and Bowing 737-MAX, have been delivered worldwide with 10,000 engines in the backlog.”

As such, Lim and Tan estimate STE’s order book to reach $25 billion, compared to $23 billion as at end-December 2022, with the above MRCVs and USS Kaohsiung contracts.

In his separate but related report, Suvro Sarkar of DBS Group Research notes that STE has a long track record of building vessels for the Singapore navy using its yards here.

In contrast, ST Engineering yards in the US were running at a loss, but were sold recently.

As such, Sarkar believes there should be scant execution issues in delivering this order.

He estimates that ST Engineering will start to enjoy meaningful earnings contributions from this contract from FY2025 onwards, in the range of $180 million to $240 million in total over the six years or so, or, between $30 million and $40 million a year, which will imply an accretion of 5.5%-7.5% compared to FY2022 earnings.

Sarkar is assuming a "conservative" margin of 5% to 6%.

"If STE is able to execute better and achieve net margins of 10% on the contract, the accretion will be even more material at 10-12% of current group earnings, which would be a very healthy outcome," says Sarkar, who is keeping his "buy" call and $4.20 target price.

Meanwhile, RHB Group Research analyst Shekhar Jaiswal is maintaining "buy" and a target price of $4.10, higher than CGS-CIMB's fair value. However, Jaiswal's target price includes an 8% ESG premium over its original $3.80 fair value, based on RHB's own methodology.

"We see STE as a unique play with a defensive yield and upside from strong growth in 2023-2025 aided by a revival in global aviation traffic boosting its commercial aerospace segment, the USS segment seeing strong growth amid contributions from the TransCore acquisition, and the Defence Public Security (DPS) segment witnessing benefits from rising defence spending in Singapore," writes Jaiswal in a March 28 note.

In addition, STE’s ability to generate strong free cash flow should alleviate concerns relating to its elevated debt levels, he adds. "We expect the ratio of net debt to equity to gradually decline during 2023-2025."

As at 10.30am, shares in ST Engineering are trading 6 cents higher, or 1.65% up, at $3.69.

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