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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Sep 2019, 9:22 PM

 

ST Engineering - a Strategic Acquisition to Springboard Satcom Capability

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  • ST Engineering’s latest proposed acquisition of Newtec, a specialist in the Satellite communications equipment and technology market, propels its Satcom reach into the broadcast and consumer space in Europe. ST Engineering expects to realise synergies and cost savings with its existing Satcom platform I-Direct to the tune of S$200m over a 5- to 7- year period.
  • We view this acquisition as having greater long-term benefits than MRAS. We raise our target price by 8.4%.
  • Maintain BUY. Target: S$4.40.

What's New

ST Engineering’s (STE) latest M&A to springboard its satellite communications (Satcom) capability.

  • ST Engineering (SGX:S63)’s €$250m (approx. S$383m) offer for Newtec will be on a cash-free and debt-free basis and translates into 14.6x EV/EBITDA and 2.7x Newtec’s FY18 revenue (ending Sep 18).
  • While Newtec is already profitable, ST Engineering expects the acquisition to be only earnings accretive in the second year, ie by end-20. The deal which is subject to regulatory approval, is expected to be completed in 2H19. 90% of the purchase consideration will involve intangible assets such as IPs and patents and this will lead to ST Engineering’s NTA being lowered to S$0.41 to S$0.3 post acquisition at end-FY18.

The business case for Newtec.

  • As an OEM of Satcom equipment, Newtec operates in the fast growing Satcom industry with an expected CAGR of 8% over the next 10 years. Newtec is especially strong in the broadcast & consumer space where its technology has been critical in providing real time content. The company was also among the first companies to successfully test over-the-air communications that will be used in low earth orbit (LEO) satellites.
  • LEO satellites are expected to take off with more than 5,000 satellite launches in the coming years. This is expected to complement the terrestrial 5G network, with applications for smart city solutions, defence, mobility and offshore and maritime markets.

Complements STE’s own Satcom business.

  • I-direct, which ST Engineering acquired in 2005, is an industry leader in the aeronautical and maritime Satcom solutions segment and is a technology provider for leading global satellite operators such as Immarsat, Intelsat.
  • Newtec on the other hand, will be focusing on IP based satellite broadcast for real-time content distribution and will be well versed to serve content providers. To that end, it will be offering products and solutions to LEO satellite operators such as Space X, One Web, Telesat, LeoSat etc.

STE expects the acquisition to be earnings accretive only from 2020 but expects to generate S$200m in revenue and cost synergies over the next 5-7 years.

  • Newtec’s EBITDA for 2018 was approximately S$26m and ST Engineering expects earnings accretion for 2020 to be less than S$10m and for 2021, it expects greater than S$10m earnings accretion.
  • ST Engineering did not guide in terms of funding mix, but have guided that gearing will range between 0.2x- 0.6x by end-19. We have assumed 20% debt funding for the acquisition and expect net gearing of 0.33x for 2019.

Stock Impact

Highly strategic acquisition, as Satcom demand is expected to grow by 10-15% CAGR over the next 10-years.

  • On balance, we believe this acquisition is even more strategic than nacelle OEM MRAS as it would lead to wider application, especially given that the 5G network is expected to be launched by 2020. With the acquisition, ST Engineering would have now gained access to cross-industry partners especially in the broadcast space, leading to new revenue streams. The use of Satcom technology will offer hybrid connectivity options for critical applications for defence, utility installations and for smart cities.
  • All, in all, we now have greater visibility on ST Engineering’s plan to double smart city revenue by 2022.

Earnings Revision / Risk

  • We raise our 2019/2020/21 earnings growth assumptions by 1%, 1.4%, and 5.3% respectively.

Valuation / Recommendation

  • We raise our fair value by 8.4% and derive a target price of S$4.40. We continue to value ST Engineering on an EV/Invested capital basis, with WACC of 6.0% and long-term growth 2.5%.

Share Price Catalyst

  • Already in place.

Source: UOB Kay Hian Research - 29 Mar 2019

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Chart Stock Name Last Change Volume 
ST Engineering 3.90 -0.04 (1.02%) 2,168 

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