SG: ST Engineering - 10% cap on Ropax contract claims

14 June 2011: ST Engineering - 10% cap on Ropax contract claims

Summary: ST Engineering (STE) has just updated that its marine arm - ST Marine (STM) - has received a letter of claim (dated 10 Jun 2011) from the lawyers of Louis Dreyfus Armateurs (LDA) in respect of the shipbuilding contract for the Roll-on/Roll-of Passenger (Ropax) ferry that was contracted in Jul 2007 for around S$179m. STM intends to dispute the claim. Furthermore, STM's position is that if it is liable, its total liability under the Ropax contract is capped at 10% of the contract price. STE believes that the ongoing Ropax dispute will not have any material impact on its NTA or EPS for FY11. As before, we think that it is still early days to assess if STE/STM has to pay damages and hence we hold off adjusting our FY11 estimates. Our worst case scenario could see a <5% impact on FY11F pre-tax profit. We are still positive on the group's overall prospects, defensive nature and do not believe that this incident will affect its strong payout (around 90% of core earnings) ability; hence we maintain our BUY rating and S$3.57 fair value (21x FY11F EPS).