ST Engineering - OCBC Investment 2019-03-29: On The Acquisition Trail

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SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - On The Acquisition Trail

• Investing for the future.
• Aids in achieving S$2b Smart-city target.
• May not be done shopping yet.

S$383m acquisition; much of it goodwill, intangibles 

• SINGAPORE TECH ENGINEERING LTD (ST Engineerig, SGX:S63) announced that it will acquire 100% of Newtec Group NV, an established Belgium-based company in the satellite communications (satcom) industry. The consideration of EUR250m (~S$383m) is payable in cash, and translates to 14.6x Newtec’s EBITDA for FY ended Sep 2018.
• We understand that goodwill and intangibles account for a significant portion of the purchase price; Newtech had NTA of ~S$8m and consolidated net assets of about S$44m as at end Sep 2018. 

Satellite communications an essential part of the future 

• Satcom is a fast-growing industry with an expected CAGR of 8% over the next 10 years, and the surge of Low Earth Orbit constellations will increase bandwidth capacity and reduce operating cost, thereby creating new demand. New use cases, especially to support Smart City applications like IoT and connected cars, will drive demand for satcom services.
• Newtec itself designs, develops, manufactures and sells satcom equipment, and provides critical satcom technologies. The proposed acquisition expands ST Engineerig’s satcom business (currently has US-based iDirect and Singapore-based satcom product and solution unit) in a meaningful way in an attractive industry that is driving connectivity advances in a world where 5G and satcom converge. This will also help the group achieve its S$2b revenue target from Smart-City related solutions by 2022-2023. 

Earnings accretive from second year post acquisition 

• About less than S$10m of integration costs per year is expected for 2020 and 2021, and along with transaction costs, the proposed acquisition is expected to be earnings accretive from the second year post acquisition (subject to regulatory approvals, closing is expected to be in 2H19).
• With this latest development, we adjust our estimates on ST Engineerig and our fair value increases from S$4.01 to S$4.07.
• Looking ahead, we would not be surprised if ST Engineerig undertakes more acquisitions given its still healthy balance sheet; post MRAS and Newtec, net gearing is expected to be around 0.6x. 

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2019-03-29

SGX Stock Analyst Report BUY MAINTAIN BUY 4.07 UP 4.010