Singapore Technologies Engineering Ltd

SGX:S63

Earnings Call Transcript 2018-Q3

[Sylvia Lee, executive]

We will invite our management team for a Q&A session. Without further delay, I'll hand over to Cedric. Cedric, please?

[Cedric Foo, executive]

Yes, thank you, Sylvia. First of all, a very warm welcome to all those who are here at ST Engineering headquarters, and also a very good morning, or good afternoon, wherever you may be, for those dialing in from the webcast.

Today, I would like to present the 9 months and the third quarter 2018 results. We start off with the group highlights, then dive in a little bit on the sector performance and then ending with the outlook and then we will take Q&A.

First, on the group highlights. In the third quarter 2018, our revenue stood at $1.6 billion, up 1% year-on-year. EBIT down slightly by 1% year-on-year. PBT was up 165 -- sorry, 2% to record $165.8 million, and net profit at $134.6 million, up 5%. If we look at the 9 months period, revenue was up 2% year-on-year, EBIT was up 7% year-on-year, PBT, 5% year-on-year; and net profit, 11% year-on-year. Our order book stood at $13.3 billion as of end September this year and about $1.6 billion of which will be delivered in the remaining months of 2018.

Group revenue breakdown. 73% of our revenue come from commercial business and 27% from defense business. The breakdown by sector are more or less unchanged: Aerospace at 42%; Electronics, 32 -- 30%; Land Systems, 18%; and Marine, 9%. In terms of geographical split by customer location, Asia constituted the largest at 61%; the United States, 20%; Europe, 12%; and others, 7%.

Let's look now at the revenue breakdown by sector. In the Aerospace sector for the third quarter 2018, we recorded $689 million, and that's up 13% compared to the restated number in 3Q 2017. Electronics recorded $491 million in revenue, up 2%. Land Systems, $297 million, down by about 10%; and the Marine sector, 137% -- $137 million, down by 16%. Others stood at $12 million, down by half; and as a group, the revenue stood at $1.6 billion and rose by 1%.

If we look at the 9 months 2018 versus 9 months 2017, the -- I just want to highlight the Electronics sector recorded $1.6 billion versus $1.55 billion last year. And if not for a one-time boost of $152 million last year, which is due to a modification of revenue estimates, the Electronics sector would have delivered higher revenue by 15%, 9 months compared to 9 months last year, instead of 4%. And as a result, the group's revenue would also be higher, and we would record 5% instead of 2% as shown in the slide.

Profit before tax. The Aerospace sector recorded $73.4 million in 3Q '18, and that's up 10%; Electronics profit before tax, $66.8 million and up 22%; Land Systems, $18 million, up 20%; and Marine, $14.9 million, down by about 29%. However, if you look at the Marine sector over the 9-month period, it recorded $34.3 million versus $22 million last year, and this was a significant increase. The others recorded a negative $7.3 million in third quarter '18 versus a positive $4.9 million. So there's a swing of about maybe $12 million.

And the main reasons for that is the absence of a one-off recharge of corporate shared services costs by others to the sectors, which happened last year but did not reoccur this year. And I must say that this has no net impact on the group as a whole, and the reason for this was that we started to consolidate our shared services, the backroom offices, into the corporate, and therefore, these costs were recorded as others. We had an estimate. And when you true up, we actually charged for the sector last year, but did not reoccur this year.

The second reason is costs associated with growth initiatives. I'd like to see these more as investments than as costs. We had communicated in our Investor Day and briefings in the past that we are poised for the future, and therefore, we have invested in Open Lab corporate venture capital, $150 million put aside for that, and also new enterprises and ventures looking at different sectors as well as digitalization businesses. The last reason is some losses from Miltope, which is a company in the United States engaging in ruggedized computers to the U.S. military. This business incurred losses, and we're actively looking to turn it around.

For the 9 months period under others, there was an even wider variance, $44.4 million versus $5.6 million negative, and these are for the same reasons I just stated for the 3 months period. But in addition to that, if you recall, we had redeemed our MTN, USD 500 million MTN in July. And therefore, there was a one-time cost incurred amounting to about SGD 15 million. And this one-time cost will, of course, be paid back in terms of interest savings over the next 12 months period. PBT margins, as you can see on the left, all sectors maintained or improved their margins except for Marine, 13% down to 11% in 3Q. However, Marines' 9-month PBT at 4% improved significantly to 8%.

Next, group net profit. Aerospace recorded $55.4 million, up 13% for the 3-month period; Electronics, $55.5 million, up 30%; Land Systems, $17.6 million, up 45%; and Marine, $12.8 million, down 35%. But again, I want to highlight it. For the 9-month period, Marine recorded $30.7 million, up 16%. Others, we have talked about in terms of the PBT chart.

Next, net profit margins, the same story. Most sectors maintained, which is group, aero -- Aerospace. Electronics, on the other hand, had higher net profit margins of 11% compared to 9% for the 3-month period. The 9-month period, the group improved its margin from 7% to 8%; Aerospace maintained at 9%; and Electronics improved from 7% to 9%; Land Systems from 5% to 6%; and Marine from 5% to 7%.

We will now look at the revenue PBT and net profit by sector. Firstly, the Aerospace sector, revenue was up 13% on a 3-month period compared to the same period last year. The higher revenue came from all 3 business groups, which is the AMM, CERO and EMS. PBT, $73.4 million, up 10%, and this higher gross profit was also a result of gain of a partial divestment of an associated company in Guangzhou. And this was partially offset by higher operating costs, also lower profits from associates and joint ventures. The net profit stood at $55.4 million, or up 13%, which is in line with the PBT increase.

Aerospace -- Electronics. The revenue stood at $491 million or up 2%. Higher revenue came largely from the LSG and the CSG group, partially offset by lower revenue from the SSG group. PBT stood at $66.8 million or up 22%, and this is a result of higher gross profit as well as lower operating costs. The net profit stood at $55.5 million, up 30%, which is in line with the PBT increase and also a result of lower tax expenses.

Finally, Land Systems, revenue stood at $297 million, down 10%. Lower revenue came from M&W, which is munitions and weapons, as well as S&T, which is services and trading. PBT stood at $18 million, 1-8, up 20% due to more favorable sales mix, and net profit stood at $17.6 million, up 45%, which is in line with the increasing PBT as well as lower tax expenses.

Finally, in the Marine sector, revenue stood at $137 million, down 16%. Lower revenue from Shipbuilding as well as Shiprepair were partially offset from higher revenue from the Engineering group. PBT, $14.9 million, which is down 29% and in line with the lower revenue and unfavorable product mix. Net profit at $12.8 million, down 35%, which is in line with the decrease in PBT and also higher tax expenses. But as I reiterated just now, the 9-month picture for Marine looks a lot better.

Finally, let me just leave you with the outlook and the CEO statement while we prepare to answer your questions. Thank you very much.

[Sylvia Lee, executive]

Thank you, Cedric. May I invite Cedric to join our President and CEO and Presidents of our 4 business sectors onstage for the Q&A session, please?

Let me do a quick introduction of the team. From your left, Mr. Lim Serh Ghee, representing Aerospace sector; Mr. Ng Sing Chan for Marine; we have Mr. Vincent Chong, President and CEO of ST Engineering; Mr. Ravinder Singh from Electronics; Dr. Lee Shiang Long, representing Land Systems sector; and you've met Cedric.

With that, I'll hand over to Mr. Vincent Chong. Vincent, please?

[Sy Feng Chong, executive]

Good morning. Good morning to all of you who are here with us at ST Engineering head office this morning, and also welcome, and good morning, or good evening, wherever you're dialing from, for those who are joining us via webcast.

So overall, in the third quarter of 2018, we performed better year-on-year. Group revenue was slightly higher. PBT and net profit grew 2% and 5%, respectively, as Cedric has taken us through just now. The Aerospace sector's better results were led by broad-based growth across its business groups, higher MRO works, higher engines output and progressive revenue recognition from the DHL and EgyptAir, Airbus PTF programs.

We also saw improvement for Electronics sector, driven mainly by higher revenue recognition from our rail electronics projects in the region and various communication projects. Our revenue for the Land Systems was down due to lower project deliveries. Its net profit was lifted by more favorable sales mix as well as favorable tax adjustments for some of the entities.

Our Marine profitability is gradually improving, though market conditions remain challenging. Year-on-year net profit for our Marine sector is 35% lower at $12.8 million in the third quarter of this year versus the same time last year. However, the sector posted its third consecutive quarterly net profit improvements if you have been tracking our results. So we are heartened by that, although the conditions outside -- in the industry continues to be quite challenging. Still on Marine, we successfully delivered the first ConRo vessel in July. And the second ConRo vessel has just successfully completed sea trials and is on plan for end November delivery.

Next, our order book remains healthy and robust at $13.3 billion, and that provides us with a strong revenue pipeline. Now in the third quarter, the group accomplished numerous key milestones. Our core businesses remained strong, and we continued to take a long-term view with respect to both operations and capital allocation planning. And we're not really unduly influenced by quarter-to-quarter results, but we are really looking at long-term sustainable growth in addition to strengthening our businesses throughout the year.

Now I'd like to share some highlights of our sector achievements. Our Aerospace sector is making inroads for its component MRO business. We secured Japan Airlines as a customer for our component Maintenance-By-the-Hour program, and we expanded the scope of our component Maintenance-By-the-Hour support for Solaseed Air. Now these are in addition to the 14-year component MBH program signed with Vietnam Airlines in April this year, making us the preferred component solutions service provider for more than 20 aircraft operators in Asia Pacific, Europe and the Middle East.

On our PTF program, we redelivered our first A330-200 aircraft, PTF aircraft to EgyptAir in August, and we're in the process of converting the second one for delivery in the second quarter of 2019. We're on our third A330-300 PTF conversion for DHL. And we'll induct our first A321 prototype by end of November this year at our Seletar facility, so we are pleased with the progress of our passenger to freighter programs at the -- for the wide-body and narrow-body segment.

In October, we announced the USD 210 million expansion plan for our Pensacola MRO facility. Now our share of the investment is USD 35 million, or 17% of the total investment value, with the rest to be funded by the city of Pensacola, Escambia County, Triumph Gulf Coast fund, et cetera, incorporated as well as the state of Florida and some other state and federal organizations. This expansion plan is significant and aligns with our commitment to continue to invest in our core business. When completed in 2022, the Pensacola facility will have a total of 4 wide-body aircraft hangar and will contribute 2.1 million man-hours to our Aerospace network. As you know, we already started operating the first hangar, first out of the 4, and we'll be building 3 more in the next few years.

As you know, North America is the world's largest aviation MRO market, so it's critically important that we continue to enhance our capabilities and offerings as well as expand our resources and network to capture growth in tandem with our customers' expanding fleets.

Still on the U.S. but on our U.S. Marine yard. We have secured orders to design and construct 2 firm and up to 4 optional Auxiliary Personnel Lighter berthing barges for the U.S. Navy and an Articulated Tug Barge with an option for a second vessel. We expect to deliver these vessels progressively from 2019 onwards. In Singapore, the Marine sector secured its first refit on a naval program -- platform for a foreign navy with operations in the Indo-Pacific region. Now notwithstanding these positive developments for our Marine sector, we remain cautious in our outlook for the Marine industry and the impact that it may have on our commercial segment.

Moving on to Smart City solutions, which is largely led by Electronics sector with some notable contributions from the land sector -- Land Systems sector as well. Our Electronics sector has made foray into Indonesia's rail segment, securing a contract to supply platform screen doors to Jakarta's new light rail transit, the Jabodebek LRT System, as you would have read from our announcement. It is a good start, and we certainly hope to continue to export more of our rail electronic solutions Jakarta and other developing cities.

Our Automatic Fare Collection, or AFC system, is one such example among many others. We recently launched an innovative, advanced AFC system, which is gateless and hands-free, adopting long-range RFID, facial recognition and stereoscopic people-counting camera technologies. Now this barrier-free AFC delivers a seamless traveling experience for commuters and optimizes operational efficiency for rail operators by up to 50% or more. Now this enhanced AFC system is in addition to the hands-free AFC system which is currently on trial in Singapore to enable people with disabilities and elderly to enter and exit the train stations with ease. So as you can see, we keep coming up with innovative solutions in the smart mobility segment.

Still on our rail solutions, we recently won a contract and are jointly developing a Rail Enterprise Asset Management System, or REAMS, with Siemens for the Land Transport Authority of Singapore. This is a software platform that will house and analyze data for Downtown Line's maintenance management systems is fleets of 92 trains across 6 systems. This is a new breakthrough for us as we get into data analytics for maintenance of rail electronics systems.

Our new market penetration on Smart City, we have extended our Smart Street Lighting solution to Hong Kong, conducting a proof-of-concept trial to deploy multipurpose lampposts in the city. In Singapore, too, we have secured a Lamppost-as-a-Platform project to deploy smart streetlamps in Geylang and one-north Business Park in Buona Vista by early 2019. Our Smart Street Lighting solutions go beyond installing just lampposts for smart lighting services. We also leverage technology to transport -- transform lampposts into smart infrastructure, facilitating seamless data exchange and analytics, offering deeper insights for predictive operations and maintenance.

Now we were very pleased when we were told that we were selected amongst numerous contenders for the Hong Kong project. In fact, more than 30 contenders, we emerged the winner. And in Singapore, we understand that there were at least 5 other bidders for the Singapore project. So we are quite heartened by the 2 wins here.

On the Land Systems front, we have won a contract for 111 2-door double-deck Euro 6 diesel buses, and we'll progressively deliver the buses to LTA from next year with the final delivery in 2020. In late October, LTA also awarded us a contract for 20-single electric buses worth about $15 million in contract value, and these will be delivered from 2019 onwards. Our long-term goal is to export our EV bus solution to Asia Pacific and Europe. Unlike China, which has been implementing electric buses full scale, adoption rate for EV buses in this region is still relatively low, so we see opportunities there for us. Beyond export opportunities, our EV bus capability buildup is to complement and strengthen the development of our autonomous bus expertise.

Now shifting to our EV bus development, which is tracking very well, we will soon start a 6-month trial in Jurong Island to demonstrate basic autonomous capabilities like lane keeping, speed adaptation, frontal vehicle following, adaptive cruise control up to 25 kilometers per hour. As you know, we have been trialing our vehicle in Sentosa for a while now, so we are going on to the next phase of trial. There's no slowing down in terms of strengthening our smart mobility capabilities, be it for rail or for electronic and autonomous buses.

Now I'd like to make 2 more points before I end my prepared remarks and then we progress to Q&A. I'd like to have -- make a quick recap of our proposed acquisition of MRAS, an established OEM of engine nacelle systems for both narrow-body and wide-body aircraft. MRAS, in partnership with Safran Nacelles, has a good combination of mature and next-generation nacelle programs, all of which are single-source contracts, and that includes the A320neo LEAP-1A nacelle, COMAC C919, Bombardier Global 7000/8000 and as well as ARJ21.

We are excited by the prospects of this investment, which is a high-value, high-IP content and complementary business to us. The proposed acquisition will help scale up our Aerospace capabilities by moving up the value chain into the OEM business of high-value nacelle components and replacement parts. MRAS's design, engineering and manufacturing know-how in advanced composite structures is also synergistic with ST Engineering's composite manufacturing capabilities. So we are looking at further group synergies before -- beyond just Aerospace.

Per our announcement, we expect the proposed acquisition to be earnings-accretive. The base purchase price of USD 630 million translates into a multiple of 10x MRAS's EBITDA and 1.2x revenue for the 12-month period ending 30th of June 2018. This is consistent with what we announced back in September when we briefed the investment community. We remain on track to close this transaction by end of first quarter 2019. Related transaction costs, including professional fees, will progressively be recognized from next quarter onwards.

Lastly, we have a leadership renewal at our U.S. -- for our U.S. business in VT Systems. Many of you may be familiar with General John Coburn, who has been helming VT Systems, our U.S. head office for 17 years since we set up our presence there in 2001. John will hand over his executive role to Tom Vecchiolla on 1 December of this year. That's in a few weeks' time, but he will remain non-Executive Chairman of the advisory board for our U.S. business. We thank John for his many contributions over the years.

Tom Vecchiolla brings with him a wealth of experience in the defense industry with 17 years in the private sector and 24 years in the public and military sector in the U.S. Of these, he spent 15 years with Raytheon Company with his last role as President, Raytheon International, where he oversaw the international sales and marketing efforts for more than 80 countries globally and he also spearheaded the market expansion into significant markets during his time. We look forward to Tom's contribution as we focus on growing our U.S. presence and business.

Now on this note, we will now take questions. Thank you.

[Sy Feng Chong, executive]

Any questions whether through the web? Is there any question? Anyone from the audience? Yes, Siew Khee?

[Lim Siew Khee, analyst]

Siew Khee from CIMB. Serh Ghee, can we just check with you on the strong performance of AMM this quarter? Is there any one-off in there?

[Serh Ghee Lim, executive]

The one-off is achieved for the divestment of the 5% stake in STA in Guangzhou facility. Compared to previous third quarter, the airframe maintenance operation actually is more robust this year. We see lesser of empty slots during this summer actually.

[Rachael Tan, analyst]

This is Rachael from UBS. I have 2 questions. One is on LeeBoy India and then the other one would be on tax adjustments. So the first would be, will you recognize any losses on that divestment of LeeBoy India, given that you had capital contribution of $250 million as of last year? And for Cedric, could you elaborate on tax adjustments from the various segments? And how should we see the tax levels going forward?

[Sy Feng Chong, executive]

So for LeeBoy India, as we announced, the impact is not material to our NTA and earnings per share. So we maintain that position. We'll share more when we review our 4Q results. But I think we should see as part of our portfolio rationalization efforts, as we will start to look at our strategic business plan and we start to look at where we have businesses that do not have longer-term fit, we will take the necessary action. So LeeBoy India is just an example of that. And this kind of portfolio review continues, MRAS investment is an outcome of this portfolio review. As we say, we want to strengthen our base business and our core business while we look for new growth opportunities in defense, export and Smart City projects.

[Rachael Tan, analyst]

Would you consider LeeBoy Brazil as non-core as well?

[Sy Feng Chong, executive]

Okay. So we typically don't announce what our plans are for specific entities. Safe to say that we continuously look at our portfolio to see what's the long-term fit. And when we do that, we don't look at our current state of performance. We look at the long-term performance potential and also our allocation of capital, what is the best disposition for our funds. As we start to grow, we also need to see where we can streamline or rationalize, and this is just one of those efforts. Now we will not specifically be commenting on any entity, but this effort continues for a while in terms of our evaluation.

[Shiang Long Lee, executive]

I'd just like to add, and I think like what Vincent has mentioned, we have outlined our growth lever for the next 5 years. So we will continue to review the businesses. As and when required, we will streamline them. And beyond considering of the business entity itself, we are looking at the allocation of capital and as well as the management bandwidth because in order to run obviously an entity, you really need to put in management bandwidth to run it well. So it is the overall capital and resources that we're looking at to make a wise business decision.

[Cedric Foo, executive]

There's another question on tax from Rachael. So if we look at the analyst slide that we presented just now, Land Systems' PBT in third quarter '18 versus third quarter '17 was up 20%. That's profit before tax. But if we turn on to profit after tax, the net profit, the Land Systems PBT was up 45%. So basically, it means that the tax burden on Land Systems is a lot less. And this is really as a result of the amalgamation of 2 Land Systems company. We have one unit called ST KIE, which was in a tax loss position and it has a deferred tax asset. So by accounting rules, if it's not capable of producing profits, then it would not enjoy the tax deduction. But post amalgamation with ST Engineering Land Systems, which is profitable, there was a recognition of about some formula in tax cadence. But this is one-off, so I would comment that the run rate tax would somewhere be around 17%, 16%, 18% for the group.

[Sy Feng Chong, executive]

I think it's important to see all these in the context of us optimizing our structure, making sure that we have efficient legal entity structure in carrying out our business and that kind of work continues. We continue to make our core business stronger. As I said, we strengthen our core business and there are quite a few areas that we work on, not just on business growth, but also look at how we streamline our processes, how we leverage on shared services, how do we leverage on scale and how do we optimize our own internal structure.

[Serh Ghee Lim, executive]

There's a question from Suvro Sarkar from DBS Vickers. Aerospace PBT margins declined to -- I guess, it says to 10.7% in third quarter this year from the 12% to 13% range in last 3 quarter. Can you explain this?

Before I give the specific reason to the drop in third quarter PBT margin, I'd like to perhaps recap what I said in past few quarters. We -- our strategy is that we will continue to strengthen and grow our core and as well as to take a longer-term view and to invest in growth areas. So in the form of strengthening and growing our core, we have actually developed new capabilities as far as the 330 and the 320P2F start-up new hanger facility as well as increase the production capacity of the floor panel in EFW. And we also identified several high-value, so-called subassembly of the aircraft that we are prepared to take a position on. And one of them is what Vincent has actually mentioned, which is the nacelle system. So all these, we are putting in a lot of investment. For the P2F, you are seeing the start-up program. There is a learning curve, so you can see that the margins are impacted. But I've said before that once we take about 5 to 8 aircraft, the learning curve will stabilize and the profit margin will go up. The ramping-up of the floor panel capacity likewise is to cater for the ramp-up of the so-called narrow-body production of Airbus. We need to have more capacity, so we started up a second facility in Kodersdorf. So there are start-up costs. And for this quarter, okay, we also took in professional fees, some professional fees for the acquisition -- proposed acquisition of MRAS. But 9-month PBT margin will still be around 11.9%, close to 12%. And our target, obviously, is that we will strive to maintain that we continue to invest for the longer-term future.

[Sy Feng Chong, executive]

There's a question, before I hand the mic over to Ravi, on the progress of MRAS acquisition, whether the necessary approvals are on track.

So we are making all the submissions. In fact, some of them have already been done. So we are on track based on the current status. But as I said, we have to go through the due process of seeking the respective approvals from the various jurisdictions that we are filing approvals for. And we expect this process will take us through the -- to first quarter of 2019.

[Serh Ghee Lim, executive]

Maybe I just wanted to add, actually there are 4 regulatory approval that we need to get, okay? One is CFIUS. It's the Committee for Foreign Investment in the U.S., then 3 others, which is the antitrust, 1 in U.S, 1 in Brazil and 1 in France. So for CFIUS, we have actually filed last week. And normally, the cycle is about 45 days, okay? So that's the reason why expect closing to be in first quarter of 2019. I don't expect the U.S. will be working during Thanksgiving and Christmas. So then for the antitrust, we got approval from the U.S. site. And the Brazil site, I think, is also -- I think is up, and we shouldn't have any problem and likewise in France.

[Ravinder Singh, executive]

So there's a question here from Gerald Wong, Crédit Suisse. Given the continued losses at Miltope, could you share from initiative to turn the business around? Any strategic plans, given the portfolio evaluation that you have done?

So first of all, Miltope is an SSA company in the U.S., which means that it has a special security agreement company that allows it to do defense business with the U.S. military. When you look at Miltope, there are actually 2 lines of business. There's a military business, where they provide a very specialized ruggedized computer to the U.S. Army. They also have a commercial business, which actually provides the Wi-Fi connectivity on aircraft, both in the Boeing and the Airbus aircraft, so they're 2 businesses. Because the military business is quite in a very narrow and specialized segment, the business have been challenged over the last few years. So we are doing a couple of things to review the business and also strengthen the business going forward. So the first thing we've done is we actually brought in a new CEO last year to help us look at the overall company. We have also streamlined the company so that it can be more cost-effective and we're actually moving -- doing some movements of the teams. They have teams in 2 different parts of the U.S. We are consolidating one location in a much stronger ecosystem, where the ecosystem for defense is much stronger.

At the same time, because access to the U.S. Defense market is a great opportunity, the U.S. Defense budget is one of the biggest in the world and the opportunities are huge. So what we are doing with Miltope is to look at all the Electronics capabilities, defense electronic capabilities that we developed in Singapore and to identify which one of these capabilities are mature and where there are opportunities in the U.S. market. So we are going through this process now and identifying which are the areas that we can bring the technology over there to the U.S. and do the production, and therefore, reach out to the U.S. military and get into the U.S. Defense market. So this is an ongoing process, both the streamlining as well as this process of identifying new markets. We have hired new people to help us to look at some of these opportunities. And this is something that's an ongoing and it would take us maybe a year or so to look at the opportunities to strengthen the company moving forward.

[Sy Feng Chong, executive]

I have a question here from Joe, a member of public. His question was whether we can elaborate on the allowance for inventory obsolescence and why there was an increase on a 9-month basis. And then he also made a comment that I would have thought that the impairment for China Specialty Vehicle businesses are very much done.

So to the statement, yes, it's not related to the China Specialty Vehicle business. If you look at our third quarter inventory obsolescence, actually lower than same time last year, same quarter last year. In first half this year, we had some inventory obsolescence related to our rotables business, but this was not something that we're too concerned about. This is just to run -- the overall running of the business. So that's -- hopefully, that answers the question. So nothing to do with -- it's not related to the China Specialty Vehicle business, and this is really the routine run of our business. Janice?

[Janice Chua, analyst]

Janice from DBS. Just a follow-up question on MRA Systems. How do you intend to fund this? Will it be on the 80-20, 20% equity and 80% loan? And given that you're working on the balance sheet harder, which is good, will it affect your dividend policy going forward?

[Sing Chan Ng, executive]

This is a U.S. acquisition. And first of all, the first question we ask ourselves is do we fund it out of Singapore? Or do we fund it out of the U.S.? And so the answer is out of the U.S. because any interest expense repatriated out to Singapore has a 30% withholding tax. So it will be funded out of VTS in the U.S. to acquire MRAS. We have looked at the balance sheet and cash flow projections of MRAS, which is strong, as well as the other VTS unit. We looked at it as a group, a U.S. group. And we have -- we intend to fund it purely from debt, and so 100% debt. And suffice to say that the bank's responses has been overwhelming because even after the acquisition of MRAS, the company is still rated AAA.

[Sy Feng Chong, executive]

Yes?

[K. Ajith, analyst]

This is Ajith from UOB Kay. I think there was a follow-up question about the dividend, that the dividend will be affected as a result of this.

[Cedric Foo, executive]

I have selective memory. Of course, management's objective is always to improve total shareholder return. And total shareholder return has a component of dividend. We are quite excited about MRAS because it is a sole-source provider in partnership with Safran for a very popular aircraft, A320neo. And therefore, I think if everything bodes well, that remains our objective, to improve TSR.

[Sy Feng Chong, executive]

Yes. And I've said this on quite a few occasions. When we look at our dividend, of course, it's all subject to shareholders' approval. We always have to seek the approval at our AGM. We look at long-term business performance rather than any quarter. And if you would ask again about the dividend payout, I ask that you look at our track record in the last 4, 5 years. We have been very, very steadfast in making sure that we return value to our shareholders. That has not changed. In fact, this MRAS will put us in an even stronger position to deliver long-term shareholder value.

[K. Ajith, analyst]

My question actually was again leading to MRAS. MRAS has settled several mature engines. And I noticed that there are some intangibles in the books. So if this -- once this mature asset stop being produced, would you recognize -- would you write them down -- write down some of these intangibles?

[Sy Feng Chong, executive]

I'll let Serh Ghee address that. We have taken all these factors into consideration. We think many of the legacy programs are really at the tail end. The financial treatments and accounting treatments are appropriate based on our due diligence. We expect this acquisition to be accretive, as I mentioned. As you will look at the first 6 months' net profit for MRAS, first 6 months to June of this year, it has made USD 24 million of net profit, so on a very steady trajectory or momentum. So we are quite overall comfortable with the financials.

[Serh Ghee Lim, executive]

Vincent actually answered the question. But just as an add-on to maybe give you some color on the OE business, okay? For any OE business, you need to have a really mature program, the current program and new program that you're going to develop, okay? So if you look at MRAS, okay, they have -- you mentioned they have a program that's very mature, okay, and then they have this, I would say, the very, very good current program, which is this LEAP-1A nacelle system. Do not write off those mature programs, okay? If you look at OE business, it's not just the supply of this equipment or the system to the 9-fleet aircraft, okay? You have to look at the aftermarket, okay? And when you look at aftermarket, it's both the spares sales as well as the MRO, okay? And all these aircraft, although the production of the nacelle system probably is completed. But the aircraft are still flying, okay? And if they do fly, there will be wear and tear, okay, and then there will be some stupid line maintenance guy, they're not into nacelle system, I'll be very happy -- sorry. And we sell spare. And spare generally is selling at 3 to 4x the production. And I will say the aftermarket is one area that actually when we look at this, okay, it's not just the ongoing program for the LEAP-1A. So when the LEAP-1A become mature, okay, then we'll be looking at we have 6,000 aircraft on order, okay, 40% of the 6,000 selected the LEAP-1A, okay? I think 23% still undecided, better is LEAP-1A or the GTF. But if you look at it, I would say that -- crystal balling a little bit, maybe 60% will be LEAP-1A. So we are looking at quite a substantial volume.

[K. Ajith, analyst]

I'm not too concerned about the LEAP-1A side. But just about the mature...

[Serh Ghee Lim, executive]

Yes. I said the mature -- we are selling spare. In fact, I would say the spare is good margin.

[K. Ajith, analyst]

So which means the likelihood of write-downs of the intangibles might be low.

[Serh Ghee Lim, executive]

As Vincent said, we've actually appropriately taken care during our due diligence.

[Sy Feng Chong, executive]

So we're comfortable. We don't expect that kind of surprises. So in fact, the portfolio is quite well balanced. It's a mix of mature and new generation nacelle systems that puts MRAS in a good position going forward. In fact, we also said at our analyst briefing in September, that is not unusual for a component supplier at this stage of the production to see a 40% to 50% ramp-up for the new -- for production of new generation components, not that we are saying it's MRAS, but I can only say that it's not unusual for component suppliers that are involved or engaged in the A320neo program to have that kind of experience. So we are in a pretty nice position.

[K. Ajith, analyst]

Okay. I've got a follow-up question, but it's not about MRAS, but about your EV buses and your plans to distribute across the region. Are you teaming up with BYD? Or is it BYD related?

[Sy Feng Chong, executive]

So we've made some very exciting announcement just last month, and then I'll leave the honor to Shiang Long. He can talk to you about his nice suite of new products that we have just introduced with partners.

[Shiang Long Lee, executive]

Okay, thanks. I'll just talk about the EV and also the related point about when we really build up the capability in Engineering in EV, actually it help us in the autonomous bus as well as the robotic because the underlying technology actually very much common. I'm sure you're aware of that. So for the EV, I think now we are looking at, first of all, the first success of delivering the 20 vehicles for LTA, and we're using that to build up the engine capability because that is our strength. We have a lot of platform capability over the years. And right now, we are starting up the Engineering center within the Land Systems. And we are exploiting the technology and see how can we partner with various OEM and various local production partner in this region. I think that is for a start. Secondly is also using the capability that we have developed to support our AV bus development because there's a lot of technology that are related. We need to have very good control of the vehicle, and that is where when we add on the artificial intelligence, we can control the bus well. So that is something that we're looking at as well.

There are discussion with partners. It is not time to fully announce it in these 2 areas for EV and AV. But relating to what Vincent has mentioned, we actually partner with others, robotic partners, which was announced last month at ITAP, I-T-A-P, Industrial Transformation Asia Pacific, and that is where we are using this capability into robotic. We have built up the capability in the autonomous capability and as well as the defense mechatronic area. And right now, we are applying for robotic. Actually from the result, what you do not see is actually how we have integrated with Aethon, U.S. company that we have bought. So all the technology are coming together. We are actually launching. Last month, we launched. And we expect to see some sales next year that we will have a series of robot that are suitable for airport, seaport and warehouses. So that is the status of that. You don't see in the number yet, but I'm confident that it will come.

[Sy Feng Chong, executive]

Yes, Patrick?

[Patrick Yau, analyst]

I just have 2 balance sheet-related questions. One, I looked at the intensity of your working capital. So it appears that inventories in both contracts are set for a reason by about maybe about $400 million against what looks to be fairly flat revenue lines. So I wanted to understand what's changing within the working capital mix. The second question is on -- I was just trying to figure out, right, that debt is actually down by almost 2/3, but interest expense is actually up by almost 30%. So I wanted to understand the dynamics in terms of what's being recorded inside the interest expense.

[Cedric Foo, executive]

Okay. Patrick, the interest expense, if you look at the slides. I'll just point to -- under finance income, right? If you look at the interest expense in 3Q '18 versus 3Q '17, you would find that actually interest income has dropped from $6.1 million to $2.5 million. But interest expense have dropped a lot from $10.4 million to $4.5 million. So -- and this is a result of the MTN redemption. And therefore, we have less debt outstanding from July 16 to end of the 3Q. So interest expense actually did drop. In terms of balance sheet, yes, it is true that working capital has increased. And this is largely due to preparation for various platforms that we have built up for. For example, I think Shiang Long can talk to some of the programs that we have won from the Singapore defense sector. And so some of the inventory has been built up, but the revenue and profits have not been recognized yet.

[Sy Feng Chong, executive]

Yes, but this -- Patrick, just to build on what Cedric said, this is just routine run of the business. Sometimes we draw down on the advanced payments by customers as part of our working capital movements as we carry our projects, but these are just pretty routine fluctuations. And for the MTN, as we mentioned in second quarter, we might have seen -- we saw a one-time hit into second quarter, but the benefits will accrue -- will come in the next few quarters. Net-net, it was a positive P&L move for us. Also cash flow optimization, capital charge has also come down as a result. So it's a good move. It was a good move and still continues to be a good move for us.

[Cedric Foo, executive]

So just to also address this point that Vincent mentioned. If we look at -- I just talked about the 3 quarter versus 3 quarter, the interest expense have come down. If you look at the 9-month versus 9-month, the interest expense 9-month 2018 is $40.6 million versus 9-month 2017 is $31.5 million. So it actually looks like it went up. But this increase is because of a one-off additional interest paid to redeem the MTN. And that amount is about USD 11 million, so to speak, so about SGD 13 million, SGD 14 million. But the interest savings for the whole year going forward after -- from July 16 onwards to next year, July 16, would be 4.85% of USD 500 million. So if you call it 5%, you're talking USD 25 million. So the savings outstrip the interest cost, the one-time interest cost. So it's not a trend line. The trend line should be coming down as we go forward.

[Rachael Tan, analyst]

This is Rachael from UBS. I have a question on the other segment. Accounting-wise, how would you treat the consolidation of your shared services? Will you be putting it into the others as well? And therefore, should we expect it, the losses there, to be a little bit higher?

[Sy Feng Chong, executive]

So we -- not just shared services, there are some initiatives that we're funding at the group level. As Cedric mentioned during his presentation, for example, we set up this new enterprises and ventures group. We also have the ST Engineering ventures group. We are also looking at -- or in fact, we already set up strategic technology centers for cybersecurity, data analytics to leverage in our group capabilities to support the entire group, which is the thing that we've been doing, we have been trying to leverage group synergies and strengths. So you will see some of this being recognized at the group level rather than at the sector level, which was traditionally the practice. You shouldn't look at those in isolation. These are initiatives that will position us for the future. And in the past, they would've manifested at the sector level. So this is one of those changes that have taken place. But Cedric also mentioned there's this absence of one-time true-up that we had in 2017 that we don't have this year. But these are at the group level, net neutral adjustments because it's either you recognize it at the corporate level or you recognize it at the sector level. So I won't be too concerned, but it is true that some of these costs will now be recognized at the group level. But these are, as Cedric also mentioned, it's not just costs, these are initiatives and investments that will position us stronger for the future as we strengthen our core businesses, leveraging on group scale.

[Shiang Long Lee, executive]

So there's a question here from Suvro Sarkar, DBS Vickers. Question number one, when would delivery of next-generation armored fighting vehicle for MINDEF start in 2019, middle of next year? Question number two, what is the likely range of revenue contribution from these delivery in '19 and '20?

Typically, we do not disclose in particular the specific program for MINDEF. So what I will say is that we will deliver the first batch in '19 and do rigorous testing, also evaluate our production line because we put in quite a fair bit of lean manufacturing and also Industry 4.0. I will say that for 2020, the production rate will be substantively higher.

[Sy Feng Chong, executive]

Any other questions from the audience here? Perhaps I'll build up on what -- where I left. Now when you see shared services and some of the growth initiatives cost at the corporate level, the benefits actually will manifest at the sector level. For example, we may -- we already today have a centralized procurement organization, but the benefit associated with the procurement center would accrue at the sector level where you have lower costs of inventory -- lower cost of material as well as savings and operating expenses across the group. So net-net, it is a positive, positive initiative for us, just from a shared services standpoint. We mentioned to you at the Investor Day that we expect the benefits to be about $150 million cumulative over the next 5 years as part of our shared services initiative. This is only one segment of it. But at the same time, we are building capabilities to strengthen the group in important areas that will enable the other business sectors, like data analytics, cybersecurity, as I just mentioned, and also some new growth areas that are now undertaken by the various business groups that I mentioned just now. Now if there are no questions -- yes, Patrick, there's one more, it seems like. Yes?

[Patrick Yau, analyst]

Okay. I'll take the opportunity. I looked at your slide on Page 33, right, and sharing about some of these new contracts under Electronics. I noted in the past that when you have large contracts on things like screen doors and all that, which are all products which have actually been supplied by STE for numerous times, is that one way to think about the Electronics division having an opportunity for better margins into 2019?

[Ravinder Singh, executive]

Okay. So first, Patrick, thanks for the question. So Electronics, we have many, many businesses. So even just in the train business, we have 6 lines of business, right? So when you go into -- let's talk about the -- when you go to the subway business, we don't do signaling, okay, we don't build the rolling stock, but we do everything else. So we do the platform, screen doors, we do the command and control system, the Passenger Information System. And now we're even doing REAMS, which I'll talk about. So first of all, when we go into these projects, we try to capture as much of the value as we can because every major line that's being built is a very significant project, and the effort we take to capture that opportunity is quite significant. And the gestation period is very long. First, lines have to be built, budgets have to be given. So when we go in, we try to capture as much of the business as possible, and there's a lot of synergy. We get margin improvement when we are able to do a couple of the systems on a single line, right? So that's where we get our money. So what we are doing, of course, we are trying to scale the business, and that's why our effort is on the internationalization and we are knocking on a lot of doors around the world. Indonesia is our latest achievement. But we are working also in other markets. Because when the volume comes up, then we can use the same design, really use the same base in terms of engineering and design and manufacturing and then deliver a lot more and then improve the margins. So if you -- just on this part of the business, we're doing 2 things. So one, we are increasing our volume by reaching out to more opportunities around the world; two, we are also moving up the value chain.

So Vincent talked about REAMS. So REAMS is a very interesting project. Our most sophisticated product prior to this was actually the command and control system, where we build the command and control system to run an entire train line, which is normally driverless, and we do the integration of all the systems in the train line, including the escalators in the train stations down to running the actual trains, right? REAMS takes this to the next level. It takes the command and control system to the level where we can do 2 major things. One is called asset management because what we do, we build a platform that connects to all the systems on the single train line. So platform screen doors, Passenger Information System, the signaling, even the way they keep the spares and so on. So we have a full visibility of the asset. That's the first thing. The second piece is we use artificial intelligence, mainly data analytics and machine learning, to get insights into the running of a single line, right, single line. So what are the insights? First, we are able to predict failure. So when should you do your replacement so that any part system won't fail? Second, we are able to optimize the life cycle cost of the line because now we know what is the replacement rate and what is the best way to optimize the particular line. The goal for most of the operators, including Singapore, is to do this for all the lines. So we would actually, in the end, build like a master platform to take in all the data. This is all software, so actually the margins will be even higher. So the short answer is we're trying to improve margins by scaling but also by moving up the value chain in doing analytics and building platforms that actually has a lot more value for the customer and also for us.

[Sy Feng Chong, executive]

Thank you, Ravi. That's a very positive note upon which we can adjourn, but there's one more.

[Ravinder Singh, executive]

Just one question. I think I sort of answered it. The question is from Conrad Werner, Macquarie. Do you expect Electronics order intake and revenue growth to accelerate from what we saw in 3Q 2018?

So if the question is about our order book and our orders -- so if you look at the bundles we've been announcing, so I think the last announcement we announced, it's -- we've got order book, orders of about $435 million, which is actually a bit lower than the previous quarter. If you look at 9 months this year and 9 month last year, last year for the first 9 months, we had orders of $1.5 billion. This year, we have orders of $1.8 billion. So quarter-to-quarter, because our projects are large and they're multiyear, the orders do go up and down, but the general trend is that they are increasing, and we hope to sustain the momentum and continue to grow.

[Sy Feng Chong, executive]

Yes. So this year, first 9 months of this year, Electronics sector accumulated, as Ravi mentioned, almost 20% more new orders than the same period or the same 9 months of last year. But as I mentioned on many occasions, we look at our order book for revenue visibility. We are not too particular about the month -- the quarter-to-quarter fluctuation. Overall, you can see the trend, our robust order book continues to give us revenue visibility. And as we continue to push for global markets, we hope to see positive developments, which is why we had the Investor Day conference to share with you our 5-year plan rather than what we see in the near term. So we certainly will keep a close watch on our progress as we move along. So Electronics sector has really made good progress this quarter as well as in the previous few quarters, and we'll continue to support our Electronics sector as we expand our global markets.

So on this positive note, I'd like to thank all of you for spending time this morning with us. For those of you who can join us for lunch, we would appreciate it, and those who joined us on the webcast, thank you very much for tuning in. We'll see you next quarter. Thank you.