Moody’s affirms ST Engineering at Aaa, but points to dividend concern after MRAS deal

U.S. one-dollar currency notes; taken September 2018.U.S. one dollar bills.

Moody’s Investors Services said on Thursday that it was affirming ST Engineering’s Aaa issuer rating after the announcement of its planned acquisition of MRA Systems, but it pointed to concerns about the size of the company’s dividend payout.

ST Engineering said last week that its wholly owned U.S. subsidiary Vision Technologies Aerospace entered a deal to acquire all of MRA Systems from General Electric for US$630 million, or around S$868 million.

While the deal will increase ST Engineering’s leverage, it can be accommodated within the company’s ratings, Nidhi Dhruv, a Moody’s senior analyst, said in a statement. Moody’s also noted that ST Engineering has a “very high” expectation of support from the government of Singapore, which is also rated Aaa.

Moody’s said it expected ST Engineering would fund the acquisition mainly with bank debt, with a pro forma forecast of the company’s gross leverage rising only marginally to about 1.8 to 1.9 times, and remaining at that level over fiscal 2019-2020, in line with levels over the past five years.

Dividend concerns

But it pointed to concerns over ST Engineering’s dividend payouts.

“STE has a track record of paying consistently high dividends, at about 15 cents per share over the last five years. The annual dividend of
S$480 million to S$500 million over the same period has been easily accommodated, given the company’s low leverage historically,” the note said.

With the acquisition, ST Engineering’s retained cash flow-to-net debt is expected to decline to around 30 percent to 35 percent over fiscal 2019-20, from 75 percent in fiscal 2017, Moody’s said.

“STE’s commitment to high shareholder returns, together with its increased acquisition debt from the planned spending on MRAS, could
weaken its cash flow metrics over the next two to three years to levels inconsistent with its current a2 BCA,” said Dhruv. BCA stands for baseline credit assessment.

But ST Engineering would have discretion to reduce shareholder returns, if needed, to keep within its ratings level, Moody’s said.

Moody’s said it expected ST Engineering’s revenue to grow by 10 percent on-year for 2019 following the acquisition, compared with revenue declines at a compound annual growth rate (CAGR) of negative 0.5 percent over the past five years.

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