- Stay BUY with SGD4.15 TP, 20% upside and c.4% FY23F yield. TransCore, a US smart mobility business that ST Engineering acquired recently, announced a USD1.07bn turnkey tolling system contract for two projects in the state of New Jersey. This should further boost the expected recovery in its urban solutions & satcom security (USSS) business. We keep our estimates unchanged as we await further details in the upcoming business update. We continue to like STE’s defensive dividend outlook, as we expect it to deliver a 10% profit CAGR in 2022–2024F.
- Contract details. The USD1.07bn (SGD1.47bn) contract comprises two projects: i) The USD914m (SGD1.25bn) contract with the New Jersey Turnpike Authority (NJTA). The project includes the design, installation, operation, and maintenance for 10 years of tolling systems on the 241km Garden State Parkway and 209km New Jersey Turnpike, two of the busiest toll roads in the US, and ii) a SGD218.2m contract with the South Jersey Transportation Authority (SJTA). The project covers the design, installation, operation, and maintenance for 12 years of an all-electronic tolling system on the 72km Atlantic City Expressway. The contract win will significantly boost STE’s order book for its USSS business, which has registered an average order win of SGD340m over the last six quarters. Given the long duration of the contracts, they should provide strong revenue visibility beyond the current forecast period.
- Outlook beyond 2022 still solid and defensive. We expect STE’s strong order book to support earnings growth beyond 2022 and estimate its 2023-2024 profit growth at 14-17% given a record-high order book, growing defence revenue, and USSS’ potentially sharp earnings recovery. STE’s latest order backlog of SGD23.1bn, which excludes the orders from its recently sold US marine business, provides over two years of revenue visibility. We estimate that STE could continue to pay a minimum of 4 cents per quarter of DPS (ie 16 cents of annual DPS) during the forecast period, implying a healthy yield of c.4%.
- STE deserves a valuation premium for its superior ESG metrics. We continue to derive our TP by using an average of P/E, P/BV, EV/EBITDA, and DCF. Based on our ESG score of 3.40 for STE, which is well above the country median score of 3.0, we attribute an 8% ESG premium to the fair value of SGD3.85.
Source: RHB Research - 22 Nov 2022
