At the same time, the credit rating agency has affirmed the company's triple A issuer rating, which takes into account the a3 baseline credit assessment rating and expectation of"very strong" support from the Singapore government through its wholly owned investment company, Temasek Holdings.
Moody's lead analyst for ST Engineering, Nidhi Dhruv, said that although the acquisition of Newtec was relatively small at S$383 million, it"comes close on the heels of STE's last debt funded acquisition of MRA Systems for S$868 million, and signals a shift in the company's acquisition strategy and a willingness to lever up its balance sheet".
She noted that its mainly debt-funded acquisitions are significantly larger than the company's recent history of acquisitions, and exposed the company to execution and integration risks. ST Engineering's gross leverage will increase to about 2.3-2.4 in FY2019 and stay above 2.0 in FY2020, which Moody's said are not in line with the company's earlier BCA of a2.
Moody's said that ST Engineering's Aaa rating remains supported by the company's strong technological capabilities, which drive its commercial business, while its defence contracts continue to support its underlying operations. It added that the company has a strong order book, with an order backlog of S$13.2 billion as at Dec 31, 2018, which supports around two times of revenue for 2018.
It added that the company's diversified portfolio of aerospace, electronics, land systems and marine will help mitigate demand volatility in any individual segment.