ST Engineering - CGS-CIMB Research 2021-03-23: Bold Expansion


ST Engineering - Bold Expansion

  • We are positive on ST Engineering (SGX:S63)’s potential acquisition of Cubic Transportation Systems, which we estimate at US$1.7bn-2.2bn (based on 2-2.5x P/sales).
  • If successful, the deal (funded via debt) may add US$75m of EBIT or 16% of ST Engineering's EBIT, in our estimate.
  • The current bidder, Veritas/Evergreen has five days to counter the higher takeout offer. We believe that the deal could be finalised in two weeks’ time.

Higher takeout offer of US$76 per share on Cubic Corporation

  • STE announced that it has bid a higher takeout offer at US$76/share to acquire US Cubic Corp (CUB-NYSE). The offer price is 8.6% above the current bidder Veritas Capital/ Evergeen Coast Capital’s offer of US$70. The Veritas offer is coming nearly six months after the initial filing that a third party was interested in the company. Immediately following the acquisition, ST Engineering would sell Cubic’s defence business, Cubic Mission and Performance Solutions (CMPS) to an affiliate of Blackstone Tactical Opportunities.
  • According to our analyst in Raymond James, the US$76 takeout price represents a NTM EV/EBITDA multiple of 17x vs a trailing 4-year average of 12.7x. The Cubic board has not withdrawn its recommendation to vote in favour of the Veritas offer, however, barring regulatory issues that may arise e.g. Committee on Foreign Investment in the United States (CFIUS). ST Engineering has obtained CFIUS approvals for transactions in the US over the past two decades, including three in 2019.

What does Cubic Transportation Systems do?

  • Cubic’s Transportation Systems (CTS) is a market leader in the intelligent transportation solutions and payments industry, with 60% market share in the US, the UK and Australia. It serves 41m passengers and processes ~14bn transactions annually. Notably, it processes the London Oyster cards, Sydney Opal cards and Chicago Ventra cards.
  • CTS generated about US$840m of revenue in 9/FY19 and 9/FY20 with EBIT before corporate cost allocation of US$121m in 9/FY19 and US$77m in 9/FY20. Key customers are transit agencies.
  • If successful, ST Engineering intends for CTS to be the global headquarters of its Smart Mobility business and to remain based in San Diego, the US. ST Engineering also intends to invest in CTS and retain the Cubic brand. In Dec 20, CTS had an order backlog of US$3.1bn.

What does ST Engineering bring to the table?

  • We think that this is the fastest route for ST Engineering to expand its vision of being a global smart city solution provider. There is synergy between CTS and ST Engineering electronics division legacy expertise in smart mobility (mainly in rail fare collection and command and control systems) in Singapore, Bangkok and Taiwan.

Defense business of Cubic is loss-making

  • Based on the offer of US$76/share, ST Engineering would acquire Cubic Corp as a group at about US$2.4bn. We think an offer price of for CTS of U$1.7bn-2.1bn would still be reasonable given the potential expansion in earnings and business development potential.
  • We think the selling price for CMPS may not be high given its loss position (FY20: EBIT loss of US$3.8m) and slightly inferior order book of US$508m as of Dec 20.

The deal could be worth US$1.7bn-2.1bn, adding 16% of ST Engineering's EBIT

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-23
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