ST Engg's AAA rating affirmed

The ST Engineering pavilion at the indoor exhibition of the Singapore Airshow 2016.
The ST Engineering pavilion at the indoor exhibition of the Singapore Airshow 2016.PHOTO: ST FILE

Ratings agency Standard & Poor's (S&P) affirmed Singapore Technologies (ST) Engineering's AAA long-term credit rating and stable outlook.

It made the finding on the basis that it expected the firm's balance sheet to "remain healthy over the next 12 to 18 months, with leverage within our tolerance levels for the rating".

S&P's report said while the company's leverage is likely to increase as it grapples with weak global economic conditions and challenges in the marine sector, it believes ST Engineering's "important role for government policy in Singapore will underpin its competitive position and result in stable volumes". The company has a monopoly in several key areas of national defence, and about a third of its revenue is linked to the Government, said S&P.

S&P said its credit assessment takes into account its view of an "extremely high" likelihood of extraordinary support from the Singapore Government, through Temasek Holdings.

"However, the headroom under our assessment of the company's 'aa' stand-alone credit profile could reduce over the period, given persistently high dividend payouts and capital spending," said S&P Global Ratings credit analyst Ng Wei Kiat.

The agency expects sizeable cash outflows for ST Engineering through 2018, citing its high distribution to shareholders and increased capital expenditure.

The agency expects sizeable cash outflows for ST Engineering through 2018, citing its high distribution to shareholders and increased capital expenditure.

Capital expenditure excluding acquisitions could reach $275 million this year and $330 million next year, compared with $273 million last year, it said.

However, it added that "we believe the company has some headroom to adjust investments or shareholder returns depending on operating performance".

Mr Ng said the stable outlook reflects expectation of ST Engineering's dominant role in Singapore's defence industry for the next 12 to 24 months, as well as its ability to adjust spending.

S&P said ST Engineering could be downgraded if Singapore's sovereign credit rating was lowered or if the likelihood of government support to the company reduces, which it said could happen if Temasek's ownership in the company falls below 50 per cent.

ST Engineering shares closed up two cents to $3.302.

A version of this article appeared in the print edition of The Straits Times on August 24, 2016, with the headline 'ST Engg's AAA rating affirmed'. Print Edition | Subscribe