How hard will ST Engineering’s dissolved construction firm hurt its earnings?

It would suffer a one-off charge of $61m.

After enduring losses from its Chinese construction business, ST Engineering announced that it would be ceasing the operations of its subsidiaries Jiangsu Huatong Kinetics Co., Ltd and Jiangsu Huaran Kinetics Co., Ltd, collectively known as JHK, parked under its Land Systems division ST Kinetics.

According to DBS Group Research, JHK had been making losses of the last three years, with the lacklustre construction sector in china to blame.

"JHK’s management has tabled a formal proposal to JHK’s Board of Directors proposing the cessation of business activities, as cash will soon run out," the brokerage firm stated, noting that ST Engineering and its partner has 15 days to come up with a decision.

So will this hurt the group in any way?

DBS said in the likely scenario that production ceases, the group via ST Kinetics will record a S$61m one-off charge in its 3Q16 financials. This includes an impairment charge in the net book value of JHK and closure costs including staff compensation.

"The one-off charge of S$61m to be taken in 3Q16 represents 12.5% of our net profit assumption of S$485m for FY16. However, the cessation of operations at JHK will lead to
lower operating losses going forward from 4Q16 and beyond as annual losses from JHK.

With this, net impact on FY16 results would be around $55 million, reducing the forecast net profit of $485 million to $430 million.