ST Engineering - OCBC Investment 2021-10-04: Proposes Largest Acquisition To Date

SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - Proposes Largest Acquisition To Date

ST Engineering announced its largest acquisition to date, with the US$2.68b (S$3.62b) proposed acquisition of TransCore from Roper Technologies.
TransCore is a market leader in North America for road transportation solutions, including electronic toll collection, and provides ST Engineering entry to the North American electronic toll collection and congestion pricing market. There is also potential to cross-sell solutions overseas.

TransCore is a good strategic fit to ST Engineering, and enhances ST Engineering’s Urban Mobility product suite.
TransCore is also the contractor for the first congestion pricing project in New York City and the US. We understand that this is a pilot project that should serve as a model for other US cities.
TransCore’s FY20 EBITDA margin of 25% is also accretive to ST Engineering, and the former also has a US$1.2b order backlog, roughly about two years in revenues. This consists of both operations and maintenance works. In particular, its 95% contract renewal rate and more than 50% of recurring revenues suggest customer stickiness and revenue visibility.

However, the acquisition does not come cheap at 16.2x FY20 EV/EBITDA, which is close to peers in the traffic systems business. ST Engineerings net gearing is also expected to increase significantly as the acquisition will be funded by debt and cash (mix not disclosed). On this note, ST Engineering’s management highlights that its dividend payout capacity remains strong.

TransCore achieved US$54m (S$72m) pre-tax profit in 1H21 and had US$1.2b of backlog as of 31 Jul 2021 (typical book-to-build leadtime is about two years). Assuming 25% corporate tax, 2.0% cost of debt and 90:10 debt-cash funding, the acquisition could add S$58m in profit after tax from FY23 onwards. Transaction (~1% of deal) and integration expenses are expected to be incurred in FY22-23. We maintain our fair value estimate of S$4.30 for now.

We note that ST Engineering scores better than the industry average on the aspects of Opportunities in Clean Tech, Labour Management, and Product Safety & Quality. About a third of ST Engineering's revenues in FY20 came from defense contracts, and this may expose the company to bidding processes that could create incentives for corruption.
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OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-10-04

SGX Stock Analyst Report BUY MAINTAIN BUY 4.30 DOWN 4.400