SATS - Exploring Funding Options For WFS Acquisition
- Despite a strong recovery in the aviation industry, the reopening of Changi Airport Terminal 2 and 4 in 2QFY23 (1 Jul 2022 to 30 Sep 2022) is likely to translate to higher staff costs ahead of the peak end-of-year travel season, which will stall SATS (SGX:S58)’s pace of earnings recovery in the near term. As such, we cut SATS’s earnings for FY23F (1 Apr 2022 to 31 Mar 2023) by 79.8% to S$6.9m, mainly to account for a wider net loss in 2Q23F. We also tone down our FY24F and 25F earnings by 15.6% and 7.0% respectively.
- We explore bear-bull scenarios of funding options for SATS’s S$1.82bn acquisition of WFS with potential target prices of S$3.05 to S$3.84. Our base case scenario assumes the following:
- S$300m funded with internal cash,
- 40% funded by hybrid instruments (~S$728m) with 50:50 split in debt-equity classification and an interest rate of 4%, as well as
- a 3% decline in interest rates from refinancing outstanding WFS debt of S$1,468m without the involvement of any strategic investors.
- The scenario will require an equity fund-raising of ~S$792m, which will lead to negligible EPS dilution assuming a flat-lined earnings contribution of S$36m from WFS in CY24F (excluding interest expense) and a right subscription price of 30% below current market price of S$3.00.
- We then derive an equity fair value of S$3.19 based on 18x consolidated earnings of SATS and WFS in CY24F, i.e. S$265.5m, on the back of SATS’ BAU (business as usual) net profit (S$200m) and WFS’s refinanced profit of S$65m, that translating to a target price of S$3.45 after adjustments for expanded share base post rights issuance. 18x P/E is at -0.5 standard deviation of its 2013-2018 pre-COVID average.
- Although the availability of funding options can mitigate the dilutive impact to EPS from a full-on EFR, we recognise the potential downside risks given the size of the deal and lack of transparency on WFS’s financials.
- The rising interest rates could erase potential finance cost savings on new debt taken up, while a slowdown in cargo volumes under a recessionary environment could hamper WFS’s profitability.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
TAY Wee Kuang CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2022-10-05 2022-10-05
Read also CGS-CIMB's most recent report:
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