ST Engineering - UOB Kay Hian 2021-10-04: US$2.7b M&A Will Provide Access To The US Toll Road Pricing Market, But At A Significant Cost


ST Engineering - US$2.7b M&A Will Provide Access To The US Toll Road Pricing Market, But At A Significant Cost

  • ST Engineering (SGX:S63) expects its US$2.7b acquisition of TransCore to complement its mobility solutions and provide access to the North American toll-collection and intelligent transportation systems market which is expected to grow from US$2.5b in 2021 to more than US$4b in 2030.
  • TransCore’s acquisition price translates into a P/E of 56x and ROIC of under 6%. The latter would be below ST Engineering’s 2019 ROIC of 16.7%. We lower our sustainable ROIC assumption by 50bp and lower our target price. Maintain BUY.

ST Engineering proposed acquisition of TransCore from US listed Roper Technologies for US$2.68b (S$3.62b) on a cash free-debt free basis.

  • TransCore Partner LLC (TransCore) is a leader in the Electronics Toll Collections (ETS) systems in North America, serving 11 of the 15 largest US toll agencies. These toll roads process US$7b in revenue annually. TransCore is in a strong position for Intelligent Transportation Systems (ITS) solutions back office solutions and RFID products. TransCore was recently contracted to deliver a congestion pricing project in Manhattan, New York, for US$500m.
  • The purchase consideration translates into 56x proforma 2020 earnings and 18.7x 2020 EV/EBITDA or 16.2x EV/EBITDA after factoring in tax benefits. It will be entirely funded via US dollar debt.
  • TransCore is currently cash flow positive and is expected to be earnings accretive two years post acquisition, factoring in transaction and integration costs of approximately US$25m and interest cost. As at 1H21, TransCore had a PBT, including profit from discontinued operations amounting to US$54m and an orderbook of US$1.2b.

Justification for the acquisition.

  • ST Engineering believes that TransCore’s electronic toll collection plans to expand its toll collection solutions to Southeast Asia.
  • Conditions that need to be met for the acquisition to be successful:
    1. receipt of approval from US antitrust,
    2. receipt of approval from the Committee on Foreign Investment in the United States (CFIUS), and
    3. ST Engineering’s shareholder approval (51%-owned major shareholder, Temasek has entered into a voting agreement with the seller.
  • If the acquisition is not for all its 11 acquisitions in the US.

Does not expect the TransCore acquisition to impinge ST Engineering's dividend payout

  • ST Engineering indicated that TransCore is highly cash generative and appears to imply that interest payments can be funded via TransCore’s operating cash flow.

Stock price likely to dip as ST Engineering undertakes the biggest M&A to date.

  • ST Engineering is seeking scale and market in a low base due to the pandemic.

ST Engineering revision & Stock Recommendation

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-10-04
SGX Stock Analyst Report BUY MAINTAIN BUY 4.05 DOWN 4.250