STEng – CIMB

The awakening

It has been more than five years since STE made a big purchase. Its latest acquisition of Singapore’s Nera Telecommunications could be a hint of its re-focus on Asia.

Maintain Outperform, earnings estimates and target price, still based on blended valuations (P/E, dividend yields and DCF). Its latest acquisition should strengthen its Electronics business, its second largest after Aerospace.

What Happened

STE via its electronics division, ST Electronics, has acquired a 100% stake in Nera Telecommunications for S$141m. The acquisition, subject to court and Nera shareholders’ approval, will be followed by Nera’s delisting from FSSTI. Controlling shareholder, Eltek ASA (50.5%),has irrevocably undertaken to vote in favour of the transaction. The acquisition will be funded internally.

Nera is a provider of products, solutions and services ranging from satellite communications and wireless infrastructure networks to internet protocol, optical and broadcast network infrastructure. Headquartered in Singapore, it was established in 1978 with strong operations in Singapore and Asia.

What We Think

STE’s last major M&A was in 2005-06,with the acquisitions of overseas companies including US iDirect and BR Lee and Denmark SAS Component. We believe the acquisition of Nera could be a sign of more M&As to come in Asia.

The acquisition should add immediately to earnings and cash flows. Nera has a clean balance sheet with zero debt (cash of S$46m). The purchase price of10x CY11 P/E appears reasonable vs. STE’s valuation (16.5x). We estimate contributions of8% to ST Electronics’s PBT or 2% to STE’s EPS. We keep our earnings estimates for now as our forecasts allow for acquisition-powered growth.

What You Should Do

Stay invested. STE has been a laggard to the other conglomerates (KEP and SCI) in the recent rally. Its share price is up only11% YTD vs. peers’20%. It is trading at 1STD below its 5-year mean and close to
its trough of 15x.

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