Hot stock: ST Engineering nears seven-week high on US$2.7b TransCore deal

SHARES of Singapore Technologies Engineering (ST Engineering) S63 soared to a near seven-week-high on Monday after the group said on Sunday it would spend US$2.68 billion to buy two US transport solutions firms - its biggest deal ever.

The mainboard-listed engineering and aerospace giant will acquire the entire interests in TransCore Partners and TLP Holdings - which provide technical solutions and engineering services to the transportation industry.

ST Engineering's counter reached a high of S$3.94 on Monday morning, up 4.2 per cent or S$0.16 as at 9.36am. The last time the counter closed near this level was on Aug 18.

Shares of ST Engineering closed at S$3.88 on Monday, up 2.6 per cent or S$0.10, with 9.4 million shares changing hands.

Analysts have been largely positive on the TransCore deal, although some have questioned if ST Engineering is paying too much. Both UOB kay Hian (UOBKH) and RHB have maintained their "buy" calls, while CGS-CIMB has maintained its "add" call.

CGS-CIMB noted that the acquisition is not cheap relative to ST Engineering's own valuations. It has an unchanged target price of S$4.54, which implies an upside of 17 per cent from Monday's closing price.

Meanwhile, UOBKH expects ST Engineering's stock price to dip as the group undertakes its biggest merger and acquisition to date.

It has lowered its target price to S$4.05 from S$4.25 previously after cutting its sustainable return on invested capital (ROIC) assumption by 50 basis points to 11.9 per cent. UOBKH's new target price represents an upside of 4.4 per cent.

Despite the large expense, ST Engineering will gain a high cash generative business as TransCore's earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of 25 per cent is double ST Engineering's electronics Ebitda margins of 10-11 per cent in FY2019-2020, CGS-CIMB said.

Being highly cash generative also implies that interest payments can be funded through its operating cash flow, UOBKH noted in a separate research note.

CGS-CIMB expects TransCore to contribute about 3-7 per cent of ST Engineering's post-acquisition profit in FY2022-2023. RHB projects the acquisition to lead to a 9 per cent increase in FY2023 profit, assuming it is entirely funded by debt.

"Even without this acquisition, we remain positive on its earnings recovery over the next 12 months," said RHB.

On Monday, RHB raised its target price on ST Engineering to S$4.85 from S$4.50, after incorporating an 8 per cent environmental, social and governance rating premium to its blended fair value estimate of S$4.50. The new target price of S$4.85 implies an upside of 25 per cent.

UOBKH and RHB do not expect the acquisition to affect dividend payouts. Despite an expected rise in gearing, RHB remains confident of ST Engineering's ability to sustain its dividend payout given TransCore's strong positive Ebitda margins.

TransCore has over 80 years of history, and provides technical solutions and engineering services for applications encompassing next-generation electronic toll collection, congestion pricing, intelligent transportation systems, back office solutions and radio-frequency identification products, ST Engineering said in a press statement on Sunday.

An extraordinary general meeting will be held for shareholders to vote on the transaction, which is expected to close by end-March 2022.

But the mega deal appears as good as done - barring regulatory challenges - as ST Engineering's majority shareholder Temasek Holdings, which owns a 50.8 per cent stake, has given its blessings.