Over the weekend, Singapore Technologies Engineering Ltd (SGX: S63), or STE, announced the acquisition of TransCore, an indirect wholly-owned subsidiary of Roper Technologies Inc (NYSE: ROP) for US$2.68 billion.
Major STE shareholder Temasek Holdings has indicated that it will vote in favour of this transaction.
The engineering conglomerate has undoubtedly been one of the more resilient blue-chip stocks during the recent downturn.
In fact, STE has seen its order book climbing steadily since the end of 2019 and has also kept its annual dividend unchanged at S$0.15 per share over the last five financial years.
This acquisition comes after a failed bid by the group to acquire Cubic Corporation back in March this year.
The company’s last acquisition was two years ago, where it bought Newtec, a satellite communication company, for EUR 250 million.
STE’s share price has surged to a seven-week high of S$3.88 on the news.
Investors should feel buoyed by this news as the engineering giant had also announced a reorganisation to align the group for future growth.
Here are five things you should know about this major transaction.
1. Boosting STE’s smart city ambitions
TransCore is a market leader in electronic toll collection solutions (ETC) and a leading provider of intelligent transportation systems (ITS).
The acquisition target provides a full range of solutions, including tolling systems, congestion pricing (think ERP), back-office solutions, and RFID solutions.
With this acquisition, STE is looking to position itself as a leader in smart mobility, which will accelerate the growth of its smart city division.
Road transportation is a key element of STE’s smart city business suite of solutions which includes security, energy management, waste and water management, and cybersecurity.
TransCore will strengthen the group’s commitment to sustainability by reducing traffic congestion and lower vehicle emissions, adding to the group’s smart mobility sub-division.
2. A strategic fit
The acquisition will also be a strategic fit for STE as it already has strengths in technology and innovation for smart rail and road solutions.
TransCore’s domain expertise is in congestion management, which has been identified as a growth area.
TransCore has long-standing customer relationships with US state transportation authorities.
Over 50% of its business consists of recurring revenue with a very high contract renewal rate of 95%.
There is also potential for cross-selling.
STE, which has completed 60 ITS projects in more than 20 countries, can bring its ITS solutions expertise to the US while TransCore can bring its tolling solutions experience to Asia.
3. Profitable with a strong order book
TransCore generated US$565 million in revenue in 2020 and has a backlog of US$1.2 billion as of 31 July 2021.
The business is profitable, reporting a profit before tax and non-controlling interests of around US$54 million for the first half of fiscal 2021 (1H2021).
If the acquisition had been completed last year, it would have raised STE’s profit after tax by around 12.5%, from S$522 million to S$587 million.
TransCore has a workforce with 1,900 staff handling 10 billion transactions annually and serving nine million accounts, including 11 out of the 15 largest toll agencies in the US.
4. Bright industry prospects
Another compelling reason for STE’s acquisition is the potential growth in the market for both ETC and ITS solutions.
The current global market size stands at US$8 billion but is projected to grow at an annual rate of 7% to reach US$15 billion by 2030.
And within Southeast Asia alone, the growth rates for ETC and ITS are estimated to be 15% and 14%, respectively, higher than the growth for the wider APAC region’s 12%.
The market for these solutions will hit US$1.2 billion in Southeast Asia and US$4 billion in the US by 2030, illustrating the long-term growth potential for STE in these two areas.
5. Healthy financial contributions
STE is committed to continuing to invest in TransCore’s team to grow the business further.
The acquisition will generate operating cash flow from year one and will add on to earnings from its second year.
The group has also reiterated that its dividend-paying capacity will “remain strong”, so investors should expect that annual dividends should not dip below S$0.15.
Get Smart: A synergistic acquisition
This acquisition looks to play on STE’s strengths and augment them further.
The group’s consideration for TransCore is in line with other recent acquisitions of transportation and toll solutions companies.
STE will convene an extraordinary general meeting in due course to seek shareholders’ approval.
If approved, the acquisition is expected to close by the first quarter of 2022.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
