SATS Ltd - CIMB Research 2015-10-23: Not a cheap neighbouring deal

SATS Ltd - CIMB Research 2015-10-23: Not a cheap neighbouring deal SATS LTD S58.SI 

SATS Ltd - Not a cheap neighbouring deal 

  • RM218m conditional offer made for 49% of Malaysian Brahim’s Airline Catering Holdings Sdn Bhd, which owns 70% of Brahim’s Airlines Catering Sdn Bhd (BAC). 
  • BAC offers catering services to 28 global airlines. 
  • We estimate SATS paid implied forward P/E of 25x and BAC could add S$3m or 1% to SATS’s FY17-18 net profit. 
  • Valuations rolled forward to CY17, which lifts target price, still based on blended DCF and 17x P/E. 

RM218m for effective 34.3% stake; flexible payment terms 

  • The purchase price is split into two tranches - RM110m to be paid upon completion and up to RM108m, which is conditional upon certain agreed financial targets being achieved. The effective stake that SATS will hold in BAC post the acquisition is 34.3%. 

BAC is a dominant player in Malaysia 

  • With the acquisition, SATS’s position in Southeast Asia is further entrenched. Including Malaysian Airlines (MAS), its largest customer and major shareholder with a 30% stake, BAC serves 28 global airlines, such as AirAsia X and Cathay Pacific, with dominant market share in Kuala Lumpur International Airport and Penang International Airport. 
  • BAC caters to an average of 190 aircraft/day and prepares an average of 35,000 to 40,000 meals/day from both airports. 

New catering agreement with Malaysian Airlines 

  • Following the restructuring exercise in de-listed Malaysian Airlines (MAS), BAC signed a new catering agreement (NCA) with MAS in Feb 15, replacing its original 25-year agreement ending 2028. The NCA is for a period of five years with the option for an additional five years’ renewal, subject to BAC meeting certain service conditions. The overall concession value is lowered by up to 25%. 

Lower earnings ahead due to narrower MAS rate 

  • We estimate BAC made an EBIT of RM43m in FY14 and RM3.8m in 1H15 (due to price suppression implemented by MAS and lower concession value agreed with MAS). Assuming a 20% reduction in revenue and EBIT from MAS’s NCA, BAC could generate EBIT of RM34m and net profit of RM26m in FY16, implying the acquisition is priced at c.25x forward P/E. 

Capacity cuts also likely to impact profit 

  • BAC’s profit could also be lower given the 20-40% cut in MAS’s international capacity as it restructures. MAS is implementing big capacity cuts on its international routes, starting with Australia in Aug 15. European flights to Amsterdam, Paris and London may also be axed soon. 
  • In addition, the ailing flag carrier plans to offload 38% of its narrow body fleet from 2016 onwards. 
  • Currency devaluation is another risk. We estimate SATS’s effective share of profit from BAC to be about S$3m p.a. (or 1% to its FY17-18 EPS). 

Maintain Hold 

  • No change to our EPS for now. 
  • However, we roll forward our valuation to CY17, lifting our target price (from S$3.54 to S$3.69). We believe current valuations price in volume growth in Changi airport and Japan’s TFK.

Jonathan Koh CFA CIMB Securities | http://research.itradecimb.com/ 2015-10-23
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.69 Up 3.54