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RHB continues to like ST Engineering following D’Crypt acquisition

Douglas Toh
·2-min read

ST Engineering announces plans to fully acquire cryptography firm D'Crypt for an initial consideration of $67 million.

RHB Bank Singapore analyst Shekhar Jaiswal is keeping “buy” on Singapore Technologies Engineering S63 (ST Engineering) with an unchanged target price of $4.45, following the company’s announcement on Dec 13 to fully acquire cryptography firm D'Crypt for an initial consideration of $67 million.

Established in 2000, D’Crypt offers solutions in encrypted communications, single-chip crypto tokens, secure computing, and high-performance computing.

An example of this can be seen in its d’Cryptor ZE project, which is the computational and security core in the Electronic Road Pricing (ERP) InVehicle Unit in use in Singapore’s ERP system.

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Jaiswal writes: “We view the acquisition positively as it further strengthens ST Engineering’s cyber business, which is a trusted provider of end-to-end IT and operating technology cybersecurity solutions for critical infrastructure and high-security enterprises.”

In addition to the initial consideration, the deal also includes an earn-out consideration of $5 million if certain earnings targets are met.

For the half year ended Jun 30, D’Crypt’s unaudited book value and net tangible assets (NTA) stood at around $48.1 million and $46.1 million respectively.

“We understand that D’Crypt’s business is profitable. Although the acquisition should be accretive to cash flow immediately, it will be marginally non-accretive to earnings in the first year,” notes the analyst.

ST Engineering expects to incur transaction expenses of around $0.6 million or around 1% of enterprise value, which will be fully incurred in FY2023.

There will also be integration expenses of about $2.7 million, which will be incurred over three years. ST Engineering expects to complete the transaction in 1QFY2024.

Jaiswal continues to like ST Engineering for its “outstanding orderbook” of $27.5 billion, which provides close to three years of revenue visibility.

He adds: “ST Engineering, which did not cut dividend payments during the Covid-19 period, now pays four cents of dividend per share every quarter, which we believe is sustainable. We estimate ST Engineering to deliver a 19% profit compound annual growth rate (CAGR) during FY2022 to FY2025.”

Key drivers noted by the analyst include strong order wins and contributions from acquisitions, while key risks include a slower revival in the company’s commercial aerospace (CA) sector, lower-than-expected contribution from acquisitions and lastly a delay in the implementation of Singapore’s smart nation initiative.

“We reiterate our investment thesis – ST Engineering should be part of every investor’s portfolio given its double-digit earnings CAGR and defensive dividend yield,” he says.

As at 1.35 pm, shares in ST Engineering are trading at two cents lower or 0.52% down at $3.79

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