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Analysts cheer ST Engineering’s revenue visibility, but Citi is not so sure

Lim Hui Jie
Lim Hui Jie12/1/2022 09:14 PM GMT+08  • 4 min read
Analysts cheer ST Engineering’s revenue visibility, but Citi is not so sure
A test track operated by Transcore. Photo: ST Engineering
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Analysts are mainly positive on Singa­pore Technologies (ST) Engineering after it announced its first big contracts from Transcore, eight months after its largest-ever acquisition became part of the company. Higher revenue for 3QFY2022 reported in its business update helped as well.

On Nov 15, ST Engineering said its new US-based unit TransCore, which it acquired for US$2.7 billion, won two contracts worth US$1.07 billion ($1.47 billion) to modernise toll collection sys­tems in New Jersey, US.

Less than a fortnight later, the company an­nounced that revenue for 3QFY2022 ended Sept 30 improved by 22% y-o-y to $2.2 billion. For 9MFY2022, revenue increased by 19% y-o-y to $6.51 billion, with growth seen across all its busi­ness segments.

In the quarter ended Sept 30, ST Engineering added new orders worth $4.8 billion, bringing its order book to a record $25 billion, of which $2.5 billion is expected to be delivered by 4QFY2022. This figure excludes $1.9 billion worth of orders from the recently divested loss-making US ma­rine business.

In line with a revised dividend policy of quar­terly instead of half-yearly payouts, ST Engineer­ing plans to pay an interim dividend per share of four cents a share, on track to bring the full-year total to 16 cents as guided, implying a yield of between 4.5% and 5%. The ex-dividend date is Dec 6 and dividends will be paid out on Dec 20.

Of the 11 brokerages with updated calls on the stock after Nov 28, nine have “buy” or equiva­lent recommendations, with target prices ranging from $3.85 to $4.74. Macquarie’s call is “neutral” and Citi’s is “sell”, with target prices of $3.73 and $3.26 respectively.

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Maybank Securities’ Kelvin Tan estimates that the TransCore contract wins will let the compa­ny book annual revenue of at least $120 million for the coming three to four years. Coupled with continuous improvement in commercial aero­space, ST Engineering enjoys clear revenue vis­ibility, says Tan, who has raised his target price from $4.20 to $4.30.

This view is shared by CGS-CIMB’s Kenneth Tan and Lim Siew Khee, who have maintained their “add” calls on the stock, along with a slight­ly raised target price of $4.03 from $3.99. Besides the New Jersey contracts won by TransCore, an­other recent big contract win was a $1.4 billion turnkey rail contract in Taiwan’s Kaoshiung city, they note.

To pay for TransCore’s acquisition, ST Engi­neering took on debt — a point of concern flagged by analysts given how rates are rising. Maybank’s Tan calls the current ratio of fixed-to-floating debt at 54:46 “well balanced”. However “as the cost of debt rises, we are mindful that acquisition fund­ing will face pressure from rising interest rates as the short duration exposes it to rollover risk upon maturity”, he adds.

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As such, ST Engineering plans to term out a portion of its floating-rate commercial paper via new fixed-coupon loans or bonds, estimated by CGS-CIMB at around $500 million to $700 mil­lion, while DBS Group Research’s Suvro Sarkar expects the figure to be between $700 million and $1 billion of floating-rate commercial paper. He says the company still has US$32 million in T-lock gains which will partly offset the interest rate for the next bond issuance or loans.

Citi’s contrarian call

Citi’s Jame Osman, meanwhile, has kept his con­trarian view on the stock. Along with his “sell” call, he has also lowered his target price to $3.26 from $3.49. Osman believes that the positives — strong order book, air travel recovery, and the de­fensive nature of ST Engineering’s business — have all been priced in already.

Instead, he sees potential downside risks aris­ing from supply and labour bottlenecks as well as cost inflation. In addition, Osman warns of po­tential operational headwinds as ST Engineering goes about integrating its various acquisitions.

As such, Osman has lowered his FY2022 and FY2023 earnings per share estimate by 4–7%, af­ter factoring in TransCore acquisition contribu­tion and its integration costs as well as higher fi­nancing costs. As of 1HFY2022, the company’s net-debt-to-equity stands at 2.4x.

When the business update was released on Nov 28 before the market opened, ST Engineer­ing shares stood at $3.50. However, since then, its share price has fallen slightly to close at $3.43 on Nov 30, valuing the company at $10.68 billion. Year to date, the stock is down 8.78%. It traded at a recent low of $3.12 on Oct 21.

On Nov 28, the company paid between $3.48 and $3.50 per share to buy back 500,000 shares, bringing the total buyback under the current man­date to 5.5 million shares, equivalent to 0.1764% of the company’s total issued shares.

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