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With Transcore contract win, it's ST Engineering’s way, on the highway

Analysts are positive on STE after a $1.07 billion contract win by subsidiary Transcore.

In the wake of a US$1.07 billion ($1.47 billion) contract win from Singapore Technologies Engineering’s (ST Engineering) subsidiary, Transcore, analysts from RHB Group Research and CGS-CIMB Research have maintained their “add” and “buy” calls on ST Engineering, with unchanged target prices of $4.15 and $3.99 respectively.

The contract win is for a turnkey tolling system contract for two projects in the state of New Jersey, USA.

One project, worth US$914 million is with the New Jersey Turnpike Authority (NJTA). The project includes the design, installation, operation, and maintenance for 10 years of tolling systems on the 241-kilometer Garden State Parkway and 209-kilometer New Jersey Turnpike, two of the busiest toll roads in the US.

The other contract is a $218.2 million 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 72-kilometer Atlantic City Expressway.

RHB analyst Shekhar Jaiswal says the contract win will significantly boost ST Engineering’s order book for its urban solutions and security services (USSS) business, which has registered an average order win of about $340 million over the last six quarters.

“Given the long duration of the contracts, they should provide strong revenue visibility beyond the current forecast period,” Jaiswal writes.

The analyst also adds that this strong order book supports ST Engineering’s earnings growth beyond 2022, and he also estimates its profit growth for FY2023-FY2024 profit growth at about 14-17%, given a record-high order book, growing defence revenue, and USSS’s potentially sharp earnings recovery.

As for CGS-CIMB’s Lim Siew Khee and Kenneth Tan, they estimate that the contracts will add about $110 million per annum in revenue over the next 3-4 years, and thereafter $120 million per annum until FY2032-FY2034, assuming a 30% project implementation phase,

With the new contracts, ST Engineering’s order book currently stands at a record high of $24.6 billion, compared to $23.1 billion at the end of September.

Lim and Tan says “We view the order wins positively as they demonstrate confidence in Transcore’s tolling solutions from authoritative bodies.”

They are also positive about Transcore’s future order momentum, given its leading market share in the US electronic toll collection (ETC) industry, the recovery in domestic traffic volumes, and further scope for the rollout of ETC solutions in the US, given the current reliance on manned booths.

Moving forward, they also think the potential rollout of congestion pricing solutions in New York City in 2023 could spur further contract wins, given Transcore’s expertise in this field.

As of 12.14pm, shares of ST Engineering were trading at $3.45, with a FY2022 P/B ratio of 4.4 and dividend yield of 5.2%.

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