Analysts upbeat on STE’s US$2.68bn TransCore deal

• Singapore Technologies Engineering (SGX: S63) share price closed at S$3.88 on Monday (04 October)
• Buying TransCore will enable STE to enter a new market
• DBS analysts expect STE to maintain dividends at S$0.15 per share
• Keen to take advantage of ST Engineering’s rising share price? Open an account with us to go long on the stock now.

RHB positive on STE earnings recovery

Shares of Singapore Technologies Engineering (ST Engineering) climbed 2.7% to finish Monday at S$3.88, with 9.4 million shares changing hands, hours after the technology, defence and engineering company announced its biggest-ever acquisition.

The blue-chip stock lost some of the gains on Tuesday morning, trading 1.8% lower day-on-day at S$3.81 as of 10:24 SGT.

ST Engineering will buy US-based transportation solutions leader TransCore for US$2.68 billion (S$3.62 billion).

RHB analyst Shekhar Jaiswal noted that near-term catalysts for STE may come from contract wins, a recovery in the commercial aerospace unit, and higher business margins.

Maintaining a ‘buy’ call with a higher target price of S$4.85, Jaiswal said he remained positive on the company’s earnings recovery over the next 12 months, even without the TransCore acquisition.

TransCore US$2.68 billion deal: What are the highlights?

ST Engineering agreed to acquire the entire ownership interest in TransCore Partners and TLP Holdings from Roper Technologies (NYSE: ROP).

The acquisition is expected to be cash-flow positive from the first year and earnings accretive from the second year after the transaction.

DBS said this should help drive a strong rebound in STE’s earnings from FY2023 onwards, as the commercial aerospace division could also stage a recovery in that timeframe.

The Singapore-based company said its dividend payout capacity ‘will remain strong’.

DBS analysts wrote: ‘Despite the expected increase in gearing, we envisage limited impact on funding costs, and cash flows should remain firm. We expect no changes to STE’s full-year dividend payout of S$0.15 for FY2021 and beyond.’

Meanwhile, RHB’s Jaiswal expects the deal to boost ST Engineering’s 2023 earnings by 9%.

The deal translates to an enterprise value (EV) to earnings before interest, taxes, depreciation, and amortisation (Ebitda) ratio of 16.2 times.

It is slated to close by 1Q 2022, subject to regulatory and shareholders’ approvals.

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Cross-selling opportunities

TransCore’s road transportation solutions will complement and enhance the Singapore group’s smart-mobility rail and road solutions, ST Engineering said.

DBS Group’s research team noted that the deal should help ST Engineering ‘plant a firm foot’ into the smart-city market in the US, opening the door ‘to a big new market’.

At the same time, it will be able to cross-sell technologically advanced smart-mobility solutions in the rapidly growing Southeast Asian market, DBS said, rating STE shares ‘buy’ with a S$4.55 target.

TransCore’s profit for the six months ended 30 June 2021 amounted to about US$54 million.

As of end-July, TransCore had an order book of US$1.2 billion. It is contracted to deliver a US$507 million congestion pricing project in Manhattan, New York.

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