CGS-CIMB analysts have maintained their ‘add’ call and $4 price target on ST Engineering, following new orders won by the company to build six ships for Singapore’s navy.
This fleet of six so-called multi-role combat vessels (MRCVs) will be used to replace the Victory class of missile corvettes in service since 1989.
Under terms of this contract, ST Engineering will be delivering the ships progressively from 2028.
As described by the Ministry of Defence, the MRCV “employs key technologies such as configurable modular payloads and unmanned systems, allowing the vessel to function as a ‘mothership’ for unmanned drones and vessels to conduct a range of missions from peace to war.”
As per normal, the size of the defence contracts won are not disclosed, but Lim Siew Khee and Kenneth Tan estimate that ST Engineering’s share of the six multi-role combat vessels to be between $1.5 and $1.8 billion.
Their estimate is based on an $880 million contract won by the company to build four patrol vessels for Oman’s navy back in 2012. The analysts assume that the recently announced contracts are of higher value and technology.
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They estimate that with this contract, coupled with a recently won contract from Taiwan’s train system, has helped lift ST Engineering’s order book to $25 billion, up from $23 billion as at end of Dec 2022.
The target price of $4 remains based on equal weightage of blended valuations consisting of PE estimates, discounted cash flow projection and a 4% yield.
Potential catalysts include earnings accretion from ST Engineering’s US transport management unit, Transcore, while key risks include higher-than expected financing costs and prolonged margin pressure.
As at 10.35am, ST Engineering shares changed hands at $3.69, up 1.65%.
