Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


ST Engineering - New Toll Collection Contract in the US; Keep BUY

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  • TransCore, a US smart mobility business that ST Engineering (SGX:S63) acquired recently, announced a US$1.07bn 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 ST Engineering’s defensive dividend outlook, as we expect it to deliver a 10% profit CAGR in 2022–2024F.

Contract Details

  • The US$1.07bn (S$1.47bn) contract comprises 2 projects:
    1. The US$914m (S$1.25bn) 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
    2. a S$218.2m 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 ST Engineering’s order book for its USSS business, which has registered an average order win of S$340m over the last six quarters.
  • Given the long duration of the contracts, they should provide ST Engineering strong revenue visibility beyond the current forecast period.

Outlook Beyond 2022 Still Solid and Defensive

  • We expect ST Engineering’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. ST Engineering’s latest order backlog of S$23.1bn, which excludes the orders from its recently sold US marine business, provides over two years of revenue visibility.
  • We estimate that ST Engineering could continue to pay a minimum of 4 cents per quarter of dividend (i.e. 16 cents of annual dividend) during the forecast period, implying a healthy yield of ~4%.

STE Deserves a Valuation Premium for Its Superior ESG Metrics

  • We continue to derive our target price for ST Engineering by using an average of P/E, P/BV, EV/EBITDA, and DCF.
  • Based on our ESG score of 3.40 for ST Engineering, which is well above the country median score of 3.0, we attribute an 8% ESG premium to the fair value of S$3.85.
  • Stay BUY on ST Engineering with S$4.15 target price, 20% upside and ~4% FY23F yield.

Source: RHB Invest Research - 22 Nov 2022

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Chart Stock Name Last Change Volume 
ST Engineering 3.90 0.00 (0.00%) 1,616,400 

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