ST Engineering’s US marine venture shows a rich order book is not always profitable

SINGAPORE Technologies Engineering (ST Engineering) has proposed divesting two loss-making marine subsidiaries in the United States, a move that has attracted nods from some analysts.

ST Engineering Halter Marine and Offshore and VT Halter Marine will be sold to the United States’ largest privately owned and operated shipbuilder Bollinger Shipyards Lockport for US$15 million.

The divestment proposal was made after a “thorough review” by ST Engineering, the Singapore mainboard-listed heavyweight said in a regulatory filing on Monday (Nov 7). The business units had incurred a combined pre-tax net loss of US$256 million in the past five years, with an annual pre-tax net loss ranging from US$40 million to US$60 million.

The deal would mark a full exit from the marine business in the US, which ST Engineering said has been challenging.

The transaction, on a cash-free, debt-free basis, will result in the company booking a non-cash loss on disposal of about S$13.3 million. Analysts expect this to have an impact of 2-3 per cent on forecast earnings for FY2022.

These subsidiaries collectively had an order book valued at S$1.9 billion as at end-September.

Despite the hit to earnings and the loss of orders, analysts appear to view the deal favourably.

Analysts at DBS and CGS-CIMB noted that the US marine subsidiaries had been a drag on ST Engineering’s profitability.

In a research note to clients, DBS wrote that the US marine business has been beset by frequent cost overruns and execution challenges in spite of its “reasonably robust order book”.

DBS had been ascribing negative margins to the shipbuilding business in its forecast horizon, because of the learning costs involved in an ice-breaker project for the US Coast Guard.

With the proposed sale, DBS wrote that it will likely review those margins upwards. It noted how ST Engineering had previously disposed of its loss-making construction vehicles businesses in China, and subsequently reported better profitability. (*see clarification note)

CGS-CIMB, meanwhile, raised its forecast for ST Engineering’s earnings for FY2023-24. It also raised its target price to S$3.99, from S$3.95, to account for the reduced earnings drag.

ST Engineering reported an 11 per cent decline in H1 FY2022 earnings before interest and taxes from its defence and public security division, which the US marine business is a part of, amid reduced state aid.

This divestment proposal is a stark reminder that investors must pay less attention to the value of order books that companies disclose, and more attention to how much of that revenue translate into profits at the end of the day.

And more companies would do well to follow in ST Engineering’s footsteps, and conduct regular portfolio reviews and rationalisation to focus on businesses that are strategic and yield higher returns. This is especially crucial with interest rates rising, as a higher yield is now required to cover a rising risk-free rate.

*Clarification note: An earlier version of this story incorrectly said that DBS noted how ST Engineering had previously disposed of its loss-making construction vehicles businesses in the US and elsewhere, and subsequently reported better profitability. ST Engineering clarified it was China where the vehicles business was disposed of. The article above has been revised to reflect this.