Published December 29, 2008

So much riding on ST Engg's UK deal

By WONG WEI KONG

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IN TROUBLED economic times like these, a S$340 million deal is good news indeed, even for a big conglomerate used to large contracts.

But to Singapore Technologies Engineering (STE), the significance of its latest UK order goes beyond mere dollars and cents.

Two weeks ago, STE announced that it has won a £150 million (S$321 million) contract to supply over 100 Bronco all-terrain tracked carriers (ATTCs) for deployment by the British armed forces in Afghanistan. The contract was awarded to STE's land systems arm, Singapore Technologies Kinetics (ST Kinetics), by the UK Ministry of Defence (UK MOD).

The new order makes up less than 5 per cent of STE's outstanding confirmed orderbook. It has, however, highlighted STE's defensive qualities at a time of a major economic downturn. As analysts have noted, with its strategic aircraft maintenance and repair (MRO) facilities in the US and its home market, STE should see more third-party work as major airlines and low-cost carriers increase outsourcing to improve profitability. As Singapore's key defence contractor, STE is positioned to benefit from any increase in defence spending by Singapore and/or its allies - with such spending usually more resilient in an economic crisis than commercial expenditure. An orderbook of S$9.5 billion provides earnings visibility, while dividend yields remain attractive at around 7 per cent.

But the UK win also means much more than all that to the home-grown defence and engineering group. To understand this, just flash back to 2000. That year, STE bid for a high-profile US$4 billion contract to supply its Bionix Infantry Fighting Vehicle (IFV) to the US Army. At the time, the Bionix, which had replaced the US-made M113 as the main IFV of the Singapore army, was seen as the best illustration of STE's land systems capabilities, and the vehicle was also well regarded in defence circles. While STE played down its chances during the bidding process, there were privately held hopes within the group that it may - against the odds - succeed.

In the event, such hopes were dashed when STE lost the bid. The process was not entirely futile. As STE chief Tan Pheng Hock was to recall in a later interview, the group extracted a lot of value out of the bid, if not in dollar terms. STE obtained a profile in the US that it never had before, and the fact that the US army was even evaluating the Bionix was an acknowledgement of the group's capabilities. And notwithstanding the lost bid, the US became the biggest market for STE across its business segments, accounting for one third of the group's revenue.

But still, there was no hiding the disappointment. And losing the US army bid confirmed to some - both within and without the group - that it would be always an uphill task for a non-traditional source like STE to win a major contract from the world's premier armed forces.

It isn't difficult then to see why the UK order - a response to an Urgent Operational Requirement (UOR) - is seen as a breakthrough deal for the STE. Partly, it will help erase some of the disappointment felt in 2000. More significantly, it has shown that STE is capable of meeting the requirements of a major army, and one that is currently conducting combat operations. The boost this will give to STE's reputation and confidence in the marketplace cannot be underestimated.

This makes it vital that the order is successfully executed. While the deal has been won, the success of the contract cannot still be taken for granted. Vehicle deliveries will commence in the third quarter next year, with the majority to be delivered in 2010. The Broncos will reach the UK to undergo transformation to become the armoured, all-terrain vehicle Warthog to replace the existing Viking in Afghanistan. The on-paper specifications of the Warthog are impressive. It will be powered by a 7.2-litre engine producing 350 bhp and will be able to move through water - all while carrying up to 14 troops. When not in water, the highly agile, all-terrain vehicle will be able to climb steep gradients, cling to severe side slopes, tackle vertical obstacles and roll across trenches. Four Warthog variants will be built under the contract - troop carrier, ambulance, command, and repair and recovery.

But as all military watchers know too well, the true test will be how the Warthog performs in operational conditions in Afghanistan. While the main Bronco model is already in peace-time service with the Singapore Armed Forces, this will be the series' (and perhaps STE's) first major test under combat conditions.

A successful deployment may open the doors to more orders from the UK and possibly from other nations, given the coalition nature of Allied operations in Afghanistan. If the deployment reveals serious failings, it will take away much of the good that came with winning the contract. STE has its work cut out to make sure, as far as it is possible, that the Warthog shines in the field.