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Acquiring cash generative tolling solutions

  • The US$2.68bn (S$3.62bn) acquisition of US TransCore (TC) could add c.S$118m to STE’s net profit (7%) in FY23F.
  • The deal is not cheap, at 16.2x FY20 EV/EBITDA (STE: 13x) and 31x FY21F P/E (STE: 20x), but is in line with STE’s plan to grow its smart city business.
  • TC is also cash generative with 25% EBITDA margin vs. STE electronics’ EBITDA margin of 10-11% in FY19-20.
  • Completion will be by 1Q22F. We expect net gearing to rise to 1.5x but for STE to keep its target dividend payout (c.90% over past 5 years of S$0.15).
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Biggest M&A in STE’s history

● TransCore Partners, LLC and TLP Holdings, LLC are indirect wholly-owned subsidiaries of Roper Technologies, Inc. (Roper). The aggregate purchase price for the acquisition is US$2.68bn (S$3.62bn) in cash on a cash-free and debt-free basis, subject to certain purchase price adjustments. Roper is divesting of this business to focus on its software business.

● TC (headquartered in Nashville, TN) is a market leader with a strong track record in electronic toll collection, congestion pricing, intelligent transport systems, back office solutions and RFID (radio frequency identification) products.

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● The deal is scheduled to be completed by 1Q22. TC achieved US$54m (S$72m) PBT in 1H21 and had US$1.2bn of backlog as of 31 Jul 2021 (typical book-to-build lead time is 2 years) with more than 50% recurring earnings and 95% renewal contract rate.

● According to Roper’s announcement, TC is expected to generate c.US$545m of revenue and US$135m of EBITDA in 2021.

● TC’s business model is not entirely based on toll revenue sharing but also involves EPC project execution with options for operational and maintenance elements. TC’s TAM: electronic toll collection to post 6% CAGR to reach US$2.5bn by 2030 and intelligent transportation systems to reach US$1.5bn in 2030. Both segments are expected to reach US$1.2bn (CAGR of 14-15%) in Southeast Asia by 2030.

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High-graded STE’s portfolio of businesses

● We think sizeable M&A is the fastest way for STE to grow its smart city as a key business. Hence, channel acquisition is key. This has also high-graded STE’s portfolio of business and allows it to gain immediate access to the US transportation market from its current focus in Singapore and Asia. There is also technology synergy opportunity in the green/low emissions zone segment such as EV charging.

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Valuations not cheap but margins high

● The deal, at 16.2x FY20 EV/EBITDA, is in line with current peers in the traffic systems business (Verra Mobility, Traffic Systems and IVU Traffic Technologies), which are trading at average c.17x CY21F EV/EBITDA. However, it is not cheap relative to STE’s own valuations or 12x CY21F EV/EBITDA and 20x CY21F P/E.

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● In return, STE gets a high cash generative business as TC’s EBITDA margin of 25% is more than double STE’s electronics EBITDA margins of 10-11% in FY19-20. STE guided for 1% transaction costs and integration costs of US$24m-25m. Assuming 3% revenue growth and 1.5% interest costs, we forecast TC to contribute c.3-7% of STE’s post acquisition profit in FY22-23F (see Figures 1 and 2).

● Maintain Add, TP of S$4.54 on blended DCF, 20.7x CY22F P/E and 4% dividend yield.