ST Engineering required to pay $129mn

The company could be liable for damages up to 10% of the Ropax contract value.

According to Phillip Securities Research, revenue for shipbuilding contract is typically booked by percentage of completion method and they believe the milestone payments are a reasonable gauge for the revenue that had been booked since commencement in 1H2008. This ROPAX contract contributed significantly (c.21%) to the shipbuilding revenue for ST Marine, which they estimate to be c.S$607mn over the past 3yrs.

At this juncture, they believe that STE is likely to take a provision charge of the maximum contractual liability for prudence sake in FY11E. The ROPAX was launched in Oct 2009 and had significant variation orders (c.S$11mn) to modify the vessel. Thus, the variation orders could be a source of the “deficiency in the deadweight capacity” as alleged. While modification to the vessel is a possibility, they said that it is unlikely that the differences could be resolved between STE and LDA for them to accept delivery of the vessel. Phillip Securities Research furthermore said, sale of the vessel to a 3rd party is a more likely option. The ROPAX was designed to operate in the English channel and could be sold to companies operating in the region.

Shipbuilding makes up c.12% of the Group revenue and c.7% of pre-tax profits. While the current dispute could hurt STE’s reputation and ability to take on other ROPAX projects, they believe that it is probably not a game changer. Currently, STE does not have any other ROPAX shipbuilding contracts on their order book and Phillip Securities Research do not foresee further contract termination resulting from this dispute at the moment.