ST Engineering - CGS-CIMB Research 2019-03-28: Right Acquisition, Be Patient


ST Engineering - Right Acquisition, Be Patient

  • We estimate Newtec’s acquisition to add c.2% to ST Engineering’s group earnings in FY20-21F, including integration costs of c.S$10m p.a. in the next two years.
  • The not so good: acquisition cost of S$383m (14.6x historical EV/EBITDA or 38x FY20F P/E) looks steep vs its own valuations for c.S$10m profit.
  • Also, net DER up to 0.6x with both Newtec and MRAS, integration challenges for 2 large-scale acquisitions and high R&D to stay competitive.
  • The good: high teens revenue growth, and new capabilities in satcom to support 5G and European market.
  • Furthermore, smart-solutions revenue could more than double in 2022.

About S$10m profit p.a. in 2020F, target to complete in 2H19

  • ST Engineering (SGX:S63) is paying €150m (S$383m) to acquire Newtech, a Belgium-based satellite communication (satcom) company at 14.6x EV/EBITDA and 2.7x revenue for FY9/18. The satcom businesses when combined with its existing satcom business, iDirect US, will produce c. S$200m (or S$0.06/share) in value creation arising from revenue and cost synergie (discounted cashflow) in five to seven years.
  • Management guided for Newtec to generate south of S$10m of net profit in FY20F and north of S$10m thereafter.

Valuations in line with peers, but need R&D to maintain growth

  • The acquisition cost looks steep vs ST Engineering own valuations but is in line with some of the peers in the US including Gilat Satellite Networks, Viasat and Comtec which are trading in the range of 13-32x FY18 EV/EBITDA.
  • Implied revenue for Newtech was S$141m in FY9/18. It has been profitable for a few years and its revenue is growing at high-teens pace. Management targets to keep the growth momentum. This should bring down the acquisition P/E in the longer-term.
  • ST Engineering acquired iDirect US in 2005 at US$165m and at an implied P/S of 2.2x then. iDirect forms the majority portion of electronics’ Communication & Sensor Systems (CSG) earnings, which had been hovering around c.S$75m p.a since 2010, c.6% growth p.a. That brings about our questions on the continuous R&D required to keep up the high-growth expectations.

Margin expansion post integration, net debt to equity to go to 0.6x

  • There will be c.S$10m of integration costs p.a. (mainly retention of staff) to be incurred in the next two years. With integration, the net margin of Newtec is similar to CSG’s c.6% as of FY18. This implies potential margin expansion post-integration from FY22F.
  • ST Engineering will gear up to fund the acquisition. Net debt to equity will rise from 0.2x (FY18) to 0.3x. Together with the completion of MRAS, net debt to equity will reach 0.6x.

Be patient, short-term pain but longer-term gain

  • Strategically, Newtec’s acquisition is a good one but share price could be capped in the short-term as the group grapples with two large-scale acquisitions over S$1bn. MRAS potential delay into 2Q19 could also be an overhang.
  • Our Target Price of S$4.08 is unchanged and based on blended valuations. Maintain ADD.

Driving connectivity as 5G and satcom converge

  • Satellite solutions are an integral part of the mainstream data network and 5G growth. According to ST Engineering’s presentation, more than 5,000 LEO (Low Earth Orbit) satellites will be launched by satellite companies such as SpaceX, OneWeb, Telesat and LeoSat. This means more demand for satcom infrastructure such as hubs, remotes, antennae etc. Newtec’s technology has been successfully tested over-the-air on LEO satellite in 2018.
  • A recent study by Euroconsult expects satcom capacity growth from 1.3Tbps in 2017 to 10Tbps in 2022 from new VHTS satellite and Low Earth Orbit (LEO) mega-constellations launches.
  • Newtech has also carried out trials for its satcom capabilities which are integrated and interoperable in the 5G environment. With Newtech, ST Engineering’s satcom business will expand from iDirect’s industry coverage of maritime, aero, military and enterprise to include consumer and broadcast segments.

Potentially exceed 2022 target to double smart city revenue to S$2bn

  • Recall that ST Engineering aimed to double its smart city revenue to S$2bn in 2022 (FY17: S$1bn) from new and existing orders. We understand that the target was set without new acquisitions. Assuming a 15% annual growth rate in revenue, Newtec’s revenue could reach c.S$250m by end-2022, adding to the smart solutions revenue target.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-28
SGX Stock Analyst Report ADD MAINTAIN ADD 4.080 SAME 4.080