ST Engineering seals S$171m contract with Swire Pacific Offshore Operations

The AHTS vessels measure 92m by 22m and we expect them to be high spec vessels. According to management, the vessels will be able to support the latest generation of semisubs in deep water and harsh environment. They will have adequate tank capacities and clear deck space of about 650 sq m for other offshore applications. The vessels will also be equipped with latest Dynamic Positioning (DP) technology.

This latest contract is ST Marine's second contract from SPO, after they successfully delivered a 68m seismic vessel to SPO earlier this year, and brings ST Engineering's new order wins this year to about S$750m. We expect outstanding orderbook to be around the S$11.0b mark currently.

As such, the contract win does not impact our assumptions materially. STE continues to deliver on its orderbook and we are currently forecasting about 8-10% EPS growth in FY11/12, the key risk being US$ depreciation. Armed with a healthy balance sheet, orderbook of close to 2.0x revenue and steady recurring stream of defence contracts, there is no change to our view of STE as a key defensive pick.

The stock has underperformed the STI by almost 10% YTD in 2011, which we feel is not justified. STE has also clarified recently that liabilities for the earlier Ropax vessel cancellation is capped at 10% of contract value and should not affect FY11 earnings materially (we estimate EPS impact should be less than 5% in the worst case). Hence, we maintain our BUY call on the stock at an unchanged TP of S$3.85. Dividend yield is attractive at 5.5% at current prices.