SATS LTD. (SGX:S58)
SATS - Breakeven In Sight & Funding Clarity To Drive Re-Rating
- Funding clarity to reduce overhang on the Company. SATS has provided clarity on its funding structure for the Worldwide Flight Services (WFS) acquisition by committing to a cap of $800mil on the rights issue. We modeled a 3 for 10 rights issue scenario at an issue price of $2.29 (~15% discount to last close) to arrive at a TERP of $2.60.
- SATS's profitability is at a key inflection point with breakeven in 2HFY23. We expect the Group to turn profitable by FY24e with the resumption of dividend in the same year.
- Initiate coverage on SATS with ACCUMULATE and a target price of $3.02. Our valuation is pegged to 18.5x FY24e, which is -1 standard deviation below its historical average.
- Risks to our view include
- Integration challenges for WFS and
- revenue growth continuing to lag behind expenses growth.
SATS – Background
- SATS (SGX:S58) is one of Asia’s leading providers of food solutions and gateway services, operating in countries across the Asia Pacific, UK, and the Middle East. Originally a subsidiary of Singapore Airlines, SATS divested from Singapore Airlines in September 2009, focusing on food solutions and gateway services. SATS has subsidiaries, associates and joint ventures across Asia and undertakes acquisitions and investments to grow its market share.
SATS – Investment Merits
- Funding clarity to reduce overhang. SATS has provided clarity on its funding structure for the WFS acquisition by committing to a cap of $800mil on the rights issue. The rest of the funds will be funded by term loans of $700mil and internal cash. We believe the latest clarity on its funding structure will alleviate some of the overhang on the stock from the uncertain funding structure.
- Profitability at key inflection point. We have modeled for SATS to reach breakeven point in 2HFY23, with the Group turning profitable in FY24e. We believe this will be driven by air travel recovering to ~80% of pre-COVID levels by the year end and the Group benefitting from operating leverage of its business. With the Group turning profitable, we expect the Group to resume the payout of dividends in FY24e.
- We like SATS for its strong cash flow generation and defensive balance sheet. SATS strong cash flow generation capability and defensive balance sheet places it well above peers. We expect SATS to generate free cash flow of ~$150m for FY24e, which will support its dividend payout.
SATS – Outlook
- We are positive on the outlook for SATS. We see SATS as a prime beneficiary of the recovery in aviation travel. Post-consolidation of WFS, with gearing at ~58%, we believe SATS will embark on a deleveraging cycle of its balance sheet in order to be more aligned to its optimal capital structure of under 50%.
Initiating coverage with ACCUMULATE rating and target price of $3.02.
- We initiate coverage on SATS with a BUY recommendation and a target price of $3.02. We peg SATS to a P/E of 18.5x FY24e, which is -1 standard deviation below its historical average.
- We view SATS as best in class with a defensive business model and superior growth profile due to its overseas expansion plans and the expansion of new concepts.
- We believe SATS is at an inflection point and model the Group reaching breakeven point by 2H23e. We expect the Group to resume the payout of dividends by FY24e as the Group reverses back into profitability.
- See
- Continue to read the PDF report attached below for complete analysis on SATS.
Terence Chua
Phillip Securities Research
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https://www.stocksbnb.com/
2022-11-21
SGX Stock
Analyst Report
3.02
SAME
3.02
