SINGAPORE (Oct 14): Analysts are bullish on ST Engineering on the back of future trends of its satcom business and recent acquisitions, which are expected to contribute positively to this segment’s growth.
To recap, the group on Sept 17 announced that its US subsidiary iDirect Government has acquired 100% ownership in Glowlink Communications Technology for a consideration of US$20 million ($28 million).
See: ST Engineering boosts satcom anti-jamming capabilities with $28 mil acquisition
On Oct 1, the group also announced that it has completed its subsidiary Singapore Technologies Engineering (Europe) has completed its acquisition of 100% ownership of Newtec Group for $383 million.
See: ST Engineering acquires satcom company Newtec for $383 mil
According to ST Engineering, this Newtec acquisition, together with the acquisition of Glowlink which possesses advanced satellite communications anti-jamming technology, will enable it to harness their unique capabilities to create a highly differentiated global satcom business group.
Combining both acquisitions, the group commands about 70-80% of market share in the aviation and broadcast industry and 18% of enterprise (eg. banks, telco, retail) globally.
The group is now in a stronger position to lead in innovation and the transformation of the satcom industry to enable Smart Cities globally.
Management guided that the Newtec acquisition could add south of S$10m net profit in FY20F and north of S$10m thereafter, with some integration costs in 4Q19.
With this, CGS-CIMB is keeping its “add” recommendation on ST Engineering with a target price of $4.36.
In a Friday report, analyst Lim Siew Khee says, “We like STE’s modular hub business model which is scalable. Customers are able to set up the initial satcom network with a few remotes/routers and gradually scale up to hubs and complex networks, locking in customers in the long-term.”
Switching costs are typically high for customers to change the end-to-end satellite connectivity infrastructure. Some of the notable customers include Inmarsat, Qatar Airways Verizon, Walmart, Singtel, Arab Satellite Communications, Marlink and Speedcast.
Lim expects ST Engineering to outperform its industrial peers in its upcoming 3Q19 earnings release, which is slated for Nov 11.
“We estimate the ST Engineering delivered 9% q-o-q and 12% y-o-y growth in profit ($151 million) for 3Q19 from a seasonally stronger 2H and full quarter earnings contribution from MRAS,” she adds.
Similarly, RHB Research continues to rate ST Engineering “buy” with a target price of $4.02.
In a Monday report, analyst Shekhar Jaiswal says, “ST Engineering’s proprietary solutions for satcom ground equipment – which it feels is superior to that of its competition – along with its ability to work with the smallest of customers and help them rapidly scale up operations and high switching costs for customers once the satcom solution is deployed, makes STE confident of building a strong presence in this segment.”
The group also reported a record high outstanding orderbook of $15.6 billion, providing revenue visibility of about 2.5 years. Including its $1 billion contract for the design and construction of the first Polar Security Cutter, the group has reported order wins of about $4.6 billion in just 1H19, compared to $5.2 billion in 2018.
As at 11.30am, shares in ST Engineering are trading at $4.03 or 5.5 times FY19 book with a dividend yield of 3.7%, according to RHB’s estimates.
