SATS LTD. (SGX:S58)
SATS - Further Funding Clarity To Reduce Overhang
- SATS has provided more clarity on its funding structure for the Worldwide Flight Services (WFS) acquisition. We believe the added clarity will further reduce the overhang on the stock. With access to an acquisition bridge facility and the rights issue underwritten, we do not expect the discount for the rights to be steep.
- Downgrade SATS to NEUTRAL from recent run-up in SATS's Share Price with higher target price of $3.08 (previously $3.02). Our valuation is still pegged to 18.5x FY24e.
The news
- SATS (SGX:S58) provided more details on its funding plan for the proposed acquisition of WFS. The $700mil in term loan will comprise a 3-year Euro-denominated term loan with an all-in cost of 4-4.5% per annum based on prevailing Euribor. The proposed rights issue is expected to be launched in 1Q23, subject to shareholders’ approval of the proposed acquisition at an EGM.
The Positives
Less concerned on discount of rights.
- With access to an acquisition bridge facility and the rights issue underwritten, we do not expect the discount for the rights to be steep. SATS had previously obtained an acquisition bridge facility of up to €1,200 million (approximately S$1,657mil) to fund and complete the proposed acquisition.
$700mil Euro term loan at 4-4.5% lower than our 5.5% forecast.
- We view the term loan positively, as it provides a natural currency hedge, and is also lower than we previously modelled. We tweaked our model slightly, taking the mid-point of the Euro term loan at 4.25% to lower our FY24e interest cost by approximately ~$7mil. The interest rates are also lower than the average 8-9% cost of debt currently borne by WFS.
Outlook
- We are positive on the outlook for SATS. We see SATS as a prime beneficiary of the recovery in aviation travel. With the added clarity on its funding for WFS, we believe SATS will see a further re-rating.
- 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%.
Downgrade SATS to NEUTRAL but with higher target price of $3.08.
- We downgrade SATS to NEUTRAL from the recent run-up in SATS's Share Price, which has moved it closer to our target price, but we move our target price higher to $3.08 (previously $3.02) as we lower funding costs for WFS.
- 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.
- See
- We believe SATS is at an inflection point and model the Group reaching breakeven point by 2H23e. We expect SATS to resume the payout of dividends by FY24e as the Group reverses back into profitability.
- Risks to our view include
- Integration challenges for WFS; and
- revenue growth continuing to lag behind expenses growth.
Terence Chua
Phillip Securities Research
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https://www.stocksbnb.com/
2022-12-07
SGX Stock
Analyst Report
3.08
UP
3.020
