Analysts are mostly positive on Singapore Technologies Engineering’s (ST Engineering) prospects after the group announced that it was acquiring mobility business TransCore on Oct 3.
CGS-CIMB Research, DBS Group Research and RHB Group Research analysts have kept their “add” or “buy” recommendations, with DBS and RHB increasing their target prices to $4.55 (from $4.36) and $4.85 (from $4.50).
CGS-CIMB has kept its target price unchanged at $4.54.
To CGS-CIMB analyst Lim Siew Khee, the sizeable acquisition is the “fastest way for ST Engineering to grow its smart city as a key business”.
The acquisition has also lifted ST Engineering’s portfolio of business, allowing it to gain immediate access to the US transportation market from its current focus in Singapore and Asia.
See: UOB Kay Hian upgrades ST Engineering to 'buy' on lower share price and new order wins
The opportunity also sees a synergy in technology in the green or low emissions zone segment such as electric vehicle (EV) charging, notes Lim.
While the US$2.68 billion ($3.64 billion) deal is in line with current peers in the traffic systems business at 16.2 times FY2020 EV/EBITDA, it is “not cheap” compared to ST Engineering’s valuations or 12 times 2021 EV/EBITDA and 20 times 2021 price-to-earnings (P/E).
That said, ST Engineering will get a high cash generative business in return as TransCore’s EBITDA margin of 25% is more than double ST Engineering’s electronics EBITDA margins of 10% to 11% in FY2019 – FY2020.
ST Engineering has guided for 1% transaction costs and integration costs of US$24 million to US$25 million.
“Assuming 3% revenue growth and 1.5% interest costs, we forecast TransCore to contribute 3-7% of ST Engineering’s post acquisition profit in FY2022-2023,” she writes in an Oct 4 report.
DBS analysts Suvro Sarkar and Jason Sum says the deal not only complements and enhances ST Engineering’s suite of smart mobility offerings, it also opens the door to a big new market in the US.
“While not immediately accretive to earnings, the deal should help drive strong rebound in earnings for ST Engineering from FY2023 onwards, as the commercial aerospace division should be staging a recovery as well in that timeframe,” write Sarkar and Sum in an Oct 4 report.
While the group’s gearing is expected to increase, the analysts from DBS expect “limited impact” on funding costs. ST Engineering’s cash flows should also remain firm.
“We expect no changes to its full-year dividend payout of 15 cents for FY2021 and beyond,” say the analysts.
While Sarkar and Sum are more conservative on the group’s earnings for the FY2021 and FY2022 compared to consensus due to the slow recovery in the commercial aerospace aircraft maintenance, repair and overhaul (MRO) business, they have estimated a “strong 23% growth” in FY2023.
Their increased target price has factored in the long-term accretion in cash flows from the acquisition.
RHB analyst Shekhar Jaiswal says his new target price has incorporated an environmental, social and governance (ESG) rating premium.
“Using our in-house proprietary methodology, we derived an ESG score of 3.4. Accordingly, we apply an
8% premium to our blended fair value of $4.50 to arrive at a $4.85 target price,” he writes in an Oct 4 report.
He also views the proposal to acquire TransCore as a positive one.
“Once completed, the acquisition should enhance ST Engineering’s offerings in smart mobility solutions and boost 2023 earnings by 9%. Even without this acquisition, we remain positive on its earnings recovery over the next 12 months,” he says.
Should Jaiswal’s estimates for the FY2023 be met, he expects that ST Engineering’s fair value and target price to be at $4.90 and $5.25 respectively.
Like DBS’s Sarkar and Sum, Jaiswal is also confident on ST Engineering’s ability to sustain its dividend payout given TransCore’s strong positive EBITDA margins, despite the expected increase in gearing.
To this end, “near-term catalysts may come from contract wins, a recovery in the commercial aerospace unit, and higher business margins,” says Jaiswal.
Finally, Citi Research has given ST Engineering a “sell” call, the only brokerage to do so, so far.
Citi analyst Jame Osman has also given a target price of $3.68 on the group, the lowest among the group of brokerages in this article.
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The target price is based on a target P/E ratio multiple of 20 times (around the past 10-year mean) applied to his FY2022 earnings per share (EPS) forecasts.
“We believe positive narratives are already been priced in, while downside risks could lead to near-term earnings disappointment and a de-rating of the stock,” he writes in an Oct 3 report.
“Our target multiple accounts for the expected earnings recovery over our forecast period (6.0% compound annual growth rate or CAGR over FY2020-23 vs. 1.5% CAGR over FY2010-19), as well as strong orderbook momentum,” he adds.
Despite the “sell” call, Osman is positive on the TransCore acquisition, as the company looks to be a “strategic fit”.
“Unlocking its potential could hinge on the execution of key existing projects and ability to cross-sell between markets (North America-SEA) for it to contribute meaningfully to ST Engineering’s bottom-line growth. Near term, we remain cautious primarily on the headwinds facing ST Engineering’s core commercial aerospace MRO business, as well as integration costs from its series of recent acquisitions,” he says.
As at 4.44pm, shares in ST Engineering are trading 5 cents lower or 1.29% down at $3.83 or an FY2021 P/B of 4.89 times and dividend yield of 3.97%, according to CGS-CIMB’s estimates.
Photo caption: Video screen grab of TransCore's Albuquerque test track / Credit: TransCore
