Is the icy spell of ST Engineering's marine division finally over?

Its US subsidiary won a contract for a US Navy Polar Security Cutter with options of up to $2.6b.

The US subsidiary of ST Engineering, VT Halter Marine (VTHM), won a contract from the US Navy for a Polar Security Cutter, a heavy icebreaker vessel, with options for up to $2.6b. According to Maybank Kim Eng, this marks a break in its prolonged icy spell of no material contract wins and likely signals a turnaround in fortune for the marine division that has been struggling for a few years.

Prospects for the marine division remained challenging due to the prolonged industry slump even as the other divisions (aerospace, electronics, and land systems) witnessed strong growth figures in the past six to eight quarters due to factors related to restructuring, acquisitions, and some demand recovery.

“This US Navy contract announcement, the single largest by VTHM in over a decade, should materially improve the division’s three to five year medium term growth outlook. We believe the business is also well positioned for growth after a series of cost control and rightsizing measures as evidenced by the past four quarters of sequential pretax profit growth despite challenging conditions,” Maybank Kim Eng analyst Neel Sinha said.

Notably, VTHM is also the prime contractor for the project. “This could be the ‘breakthrough’ US defence related big project win that it has been pursuing for some time, but awards thus far have been relatively small,” Sinha added.

However, the immediate impact of the deal will likely be small and material contributions to marine will only start in FY2021 assuming a 36-40 month engineering, procurement, and construction (EPC) period. The first Polar Ice Cutter is due to be delivered in 2024 and options for the other two ships, if exercised, due in 2025 and 2027.

Maybank Kim Eng forecasts ST Engineering’s profit to rise 2% for FY2021.