DEFENCE and engineering group ST Engineering : S63 0% (STE) is proposing to divest all of its US marine subsidiaries, namely VT Halter Marine and ST Engineering Halter Marine and Offshore (STEHMO), to Bollinger Shipyards Lockport for US$15 million.

The transaction will be on a cash-free, debt-free basis and subject to net adjustments to working capital, if any, post-closing.

It is expected to result in a non-cash loss on disposal of about S$13.3 million.

STE may also receive post-closing earnout payments of up to some USS$10.3 million should Halter Marine be awarded certain future shipbuilding contracts, provided that the contracts meet the requisite operating profit margins.

On Monday (Nov 7), the group said its proposed divestment comes as part of its ongoing portfolio review and rationalisation.

After conducting a “thorough review” of its two US marine subsidiaries, the group found that the business units incurred a combined net loss before tax of US$256 million in five years spanning 2017 to 2021, with an annual net loss before tax ranging from US$40 million to US$60 million.

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This has resulted in the group engaging Macquarie Capital as its financial adviser to conduct an auction process involving both strategic investors and private equity funds.

Bollinger was determined as the most suitable purchaser given its “good reputation and strong track record in undertaking US Navy and US Coast Guard programmes”, said STE.

Some 20 years ago, STE and Bollinger were at loggerheads over the ownership of Halter Marine – which was then a division of Friede Goldman Halter before the troubled offshore equipment manufacturer filed for bankruptcy and sold off its assets.

In July 2002, STE emerged victorious at an auction with its winning US$66 million bid for Halter Marine. This was met with objections by Bollinger, who previously made a lower US$48 million offer for the company in May before it was put up for auction.

Citing security concerns in the wake of the Sep 11 attacks, Bollinger argued it would be illegal for a foreign company to purchase the assets of Halter Marine, although the transfer of Halter Marine’s assets to STE eventually went through.

The former adversaries are now on the same side.

“As a designer and builder of high-performance vessels, the group believes that Bollinger has the capability and resources to add value to both businesses’ programmes, including the Polar Security Cutter,” said STE in its latest Nov 7 statement.

Highlighting the “challenges and losses” of operating the two US shipbuilding and ship/rig repair businesses in recent years, STE’s group president and chief executive Vincent Chong said the decision for STE to exit the US marine business was a “difficult” one.

“We believe that this proposed transaction represents a favourable outcome for ST Engineering shareholders, Halter Marine and STEHMO as well as their stakeholders,” commented Chong.

Despite the proposed divestment, STE highlights the US as a key market for the group and says it will continue to invest in its other businesses in the US. This includes focusing on its existing defence business, and expanding its commercial businesses such as in commercial aerospace and smart mobility.

The group adds that its marine business in Singapore “continues to be core and strategic”.

CGS-CIMB is positive on news of the proposed disposal, and sees a potential margin uplift for STE in FY2023-2024 as a result.

The research house on Monday raised its price target on the stock to S$3.99 from S$3.95 previously while maintaining its “add” call on the stock, as it factors in 4 to 5 per cent higher earnings-per-share estimates on the back of higher defence segment operating profit margin (OPM).

While CGS-CIMB lowered its FY2023 to FY2024 marine revenue projections due to the disposal, it has raised the defence segment’s OPM by 12 to 12.3 per cent, versus the previous 10.5 to 10.8 per cent, after factoring in a “reduced earnings drag” in the absence of the loss-making US marine businesses.

Its analysts said they view the divestment favourably given that the marine businesses have been loss-making for STE since FY2017. They also noted that the group’s order book remains at a record high of S$23.1 billion as at end-September 2022 even after accounting for a S$1.9 billion order book reduction post its exit from the US marine business.

Shares of ST Engineering were trading S$0.02 or 0.6 per cent higher at S$3.35 as at 1.42pm on Monday, after news of its proposed divestment.