Fears of a massive cost overrun on a potential SGD 2.6bn ($1.8bn) newbuilding project may have been behind Singapore Technologies Engineering’s decision to sell its US shipyards, say analysts at Nomura.

On Monday the company announced plans to dispose of VT Halter Marine and ST Engineering Halter Marine and Offshore (STEHMO) to Bollinger Shipyards for $15m.

ST Engineering said the disposal comes following a “regular portfolio review and rationalisation to ensure that it focuses on businesses that are strategic and which yield higher returns”.

The two US business units are said to have incurred a combined net loss before tax of $256m over the 2017 to 2021 period, with an annual net loss ranging within SGD 56-85m.

“We have experienced challenges and losses in the past years operating the two US shipbuilding and ship/rig repair businesses,” admitted ST Engineering chief executive Vincent Chong.

“We believe that this proposed transaction represents a favourable outcome for ST Engineering shareholders, Halter Marine and STEHMO as well as their stakeholders.”

VT Halter Marine was awarded the design and construction of the US Coast Guard’s Polar Security Cutter vessels in 2019 in a deal worth SGD 1bn potentially rising to SGD 2.6bn with options.

The first vessel was due to be delivered in 2024, but construction had not begun as of the second quarter of 2022.

ST Engineering management had previously admitted to an extension of the design phase and a rightward shift of timelines owing to the company still working on change requirements from the client.

“We think it possible that project delays may have pushed the project into non-viable territory, with ST Engineering exiting the businesses at an opportune moment to avoid further losses, particularly for a high-profile project,” said Nomura analyst Ahmad Maghfur Usman.

“This is supported by the fact that the Singapore marine businesses will be retained, according to management, and are still considered strategic and core to ST Engineering.”

Usman said ST Engineering’s marine businesses has struggled with profitability in the past, with the group reorganizing marine from one of its four major segments to a part of defence and public security in its 2021 business reorganisation.

“In 2020, the first year after the program began, ebit for marine had dropped 71% year-on-year to SGD 18m to 2.6% ebit margin in 2020 versus 9.7% in 2019, perhaps another indication of the project hurting the bottom line for the US marine businesses,” said Usman.

“If this is indeed the case, we think it a good move for ST Engineering to exit the cyclical shipbuilding businesses, and focus on its existing core and more profitable businesses.”