RHB Group Research analyst Shekhar Jaiswal has maintained his ‘buy’ call for ST Engineering with an unchanged target price of $4.25 following the company’s proposal to acquire Cubic Corp.

Jaiswal views the proposal positively, saying in a March 24 research note that it should enhance ST Engineering’s offerings in smart mobility solutions and offer higher earnings for its urban solutions and satellite communications segments.

SEE:ST Engineering launches largest ever M&A bid of US$2.4 bil for Cubic Corp

“ST Engineering believes (and we agree) that Cubic’s Transportation System (CTS) will be an excellent fit with its strategy to pursue growth in the Smart City domain,” he adds. He notes that based on 2020 data, Cubic CTS’ revenue and EBIT would have boosted ST Engineering’s FY2020 ended December revenue and EBIT by 16% and 33% respectively.

However, Jaiswal points out that given the lack of financial details at this stage, the impact of the transaction on earnings and gearing is difficult to assess.

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“If confirmed, ST Engineering plans to fund the transaction largely with debt. This will raise its gearing level, which may affect its credit rating and dividend outlook. However, the sale of Cubic's Mission & Performance Solutions (CMPS) should enable ST Engineering to defray its acquisition cost and lead to a lower-than expected rise in gearing,” he says.

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Notwithstanding the proposed acquisition, Jaiswal maintains that ST Engineering’s outlook remains positive on the back of an earnings recovery in 2021.

"Other than inorganic growth, near-term catalysts may be from contract wins, a recovery in the commercial aerospace unit, and higher margins,” he adds.

As at 3.39pm, shares in ST Engineering are up 1 cent or 0.26% higher at $3.86.