ST Engineering - UOB Kay Hian 2019-09-18: Acquisition Of Glowlink Should Strengthen STE’s Satcom Capabilities

SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - Acquisition Of Glowlink Should Strengthen STE’s Satcom Capabilities

We are enthused by ST Engineering (SGX:S63)’s latest acquisition. While the absolute amount is relatively small, it is expected to complement not just the S$383m Newtec acquisition, but its own industry positioning in aeronautical and maritime Satcom applications.
ST Engineering’s stock price has declined by 10% post 2Q19 results. We recommend investors add positions at current levels.
Upgrade to BUY. Target: S$4.34.

Six months after acquiring Newtec for S$383m, ST Engineering has made yet another satellite communications (satcom) acquisition, Glowlink Communications Technology (Glowlink) via its US subsidiary I-Direct. The US$24.3m (S$33.5m) acquisition has been completed and was derived after adjusting for net debt and working capital. The acquisition values Glowlink at 3.0x net assets as at 31 Mar 19.

Founded in 2000 at the height of the satcom boom, Glowlink provides innovative solutions that mitigate satellite interferences, via anti-jamming capabilities and improves the quality and reliability of satcom. Its satellite network management solutions are able to detect and remove satellite signal interferences in an increasingly dense satellite space. As more satellites are launched in the next few years, satcoms with anti-jamming capabilities are expected to be in demand.

Newtec is currently focused on supporting IP-based satellite broadcast for real-time content distribution, and Glowlink’s anti-jamming capabilities will likely be integrated to advance Newtec’s product offering to customers such as Space X, One Web, Telesat, LeoSat etc. In addition, ST Engineering will be able to offer satellite connectivity options for defence, utility and smart cities, with enhanced security features.

ST Engineering had earlier guided that integration costs would result in no more than a S$10m earnings decline from 2018’s S$26m in EBITDA, while 2020’s earnings is expected to rise by more than S$10m y-o-y in 2020. With the acquisition, there is possibility that Newtec’s earnings growth could be stronger.

We have not raised our 2020 earnings assumption as yet, but have factored in the acquisition cost for 2019.
We do not expect the acquisition to impact dividend payout of S$0.155 (2018: S$0.15). See ST Engineering's dividend history.

ST Engineering’s stock price has declined by 10% post 2Q19’s results. We had then downgraded the stock and suggested an entry near S$4.00. At current share price of S$3.90, we believe downside risk is low.
ST Engineering has a triple –A credit rating from S&P and Moody’s and offers a dividend yield of 4.0% at current levels. Our target price is slightly lowered from S$4.36 to S$4.34, after factoring in the acquisition cost.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-09-18

SGX Stock Analyst Report BUY UPGRADE HOLD 4.34 DOWN 4.36