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Analysts mixed on SATS's proposed WFS acquisition; UOB Kay Hian downgrades call to 'hold'

Felicia Tan
Felicia Tan9/29/2022 01:40 PM GMT+08  • 5 min read
Analysts mixed on SATS's proposed WFS acquisition; UOB Kay Hian downgrades call to 'hold'
The airline ground handler and food catering services provider said that it plans to acquire WFS, which is the world’s largest air cargo handling firm for EUR1.19 billion ($1.64 billion) in cash on Sept 28. Photo: SATS
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Analysts are mixed on SATS’s proposed acquisition of Worldwide Flight Services (WFS), with CGS-CIMB Research retaining its “add” call and target price of $4.47.

The acquisition was formally announced by SATS on Sept 28. The airline ground handler and food catering services provider said that it plans to acquire WFS, which is the world’s largest air cargo handling firm for EUR1.19 billion ($1.64 billion) in cash.

The consideration translates to an EV/ebitda and P/E of 9.75x and 45.1x based on trailing 12-month (TTM) financials disclosed as at March.

“In terms of EV/ebitda, valuation is in line with historical average of 9.8x, according to Menzies,” say CGS-CIMB analysts Tay Wee Kuang and Lim Siew Khee. “Menzies was also subsequently acquired by Agility at a 10.7x valuation.”

In their report, the analysts see upside potential from the acquisition from future refinancing.

While WFS currently owns $1.67 billion of debt, which is serviced at an interest rate of 7%-8% per annum (p.a.), Tay and Lim believe SATS has room to recapitalise WFS thanks to its strong balance sheet and credit history, as well as strong shareholder support.

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“Assuming a lower interest rate of [around] 4% post refinancing, interest savings could amount to [an estimated] $67 million per year, making the acquisition more palatable at 16.9x. However, such savings are expected to only be reaped in FY2025 due to clauses on existing bonds preventing premature refinancing,” the analysts write.

On the acquisition, the analysts see that the opportunity -- which will extend SATS’s market reach beyond APAC into US and Europe with immediate market-leading positions without operational overlap, especially in the cargo handling space -- is hard to come by.

Upon completion, the combined network will cover trade routes responsible for more than 50% of global air cargo volume. WFS operates in five of the top 10 cargo airports in North America and EMEA, including Los Angeles, Chicago, Miami, Frankfurt and Paris. SATS is already present in four of the top 10 cargo airports in Asia, including Hong Kong, Taipei, Singapore and Beijing.

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As investors mull their options on the stock, the analysts from CGS-CIMB note that it is premature to bake in forecasts of the combined entity in SATS’s figures at this point in time with the purchase price allocation (PPA) undetermined and uncertainty to normalisation of earnings profile of WFS.

“Investors can also take heed from the equity fund-raising (EFR) illustration provided by SATS, which we believe to be [the] worst-case scenario for fund-raising structure, with the entire acquisition consideration of $1.82 billion (i.e. EUR1.313 billion) to be funded via a combination of a $1.7 billion rights issue at $2.79 subscription price and $120 million from internal cash reserves, leading to a theoretical ex-rights price (TERP) of $3.49,” they write.

“SATS's target base case entails a mix of EFR, placement of new shares, as well as equity-linked instruments which could mean a less punitive dilution,” they add. That said, they are awaiting clarity on the funding profile of the WFS acquisition.

To this end, the analysts say long-term shareholders may stay invested although near-term share price could weaken on macro uncertainty.

UOB Kay Hian downgrades recommendation

Meanwhile, UOB Kay Hian analyst Roy Chen has taken a more negative view on SATS, as he downgrades his call to “hold” from “buy” previously.

To him, the proposed acquisition is a good strategic fit for SATS but he remains cautious on the impact that a global recession may have on air cargo businesses.

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He writes: “The portfolio/network of SATS and WFS are highly complementary to each other – SATS is currently concentrated in Asia while WFS is strong in North America and Europe with leading positions at key air hubs in the two regions. Out of the 164 locations WFS operates from, only four overlap with SATS’ existing locations. The acquisition will transform SATS from an Asia-focused operator to a global leader in aviation services.”

The acquisition also has potential for synergy realisation, in which some near-term synergies would include cross-selling opportunities to the combined customer base and enhanced service offerings backed by the enlarged network.

However, he points out that the acquisition valuation is not a bargain but within reasonable range.

“The implied transaction EV/ebitda multiple of 9.7x (pre-synergies) is slightly richer than SATS’ current price implied FY2025 (normalised year) EV/ebitda of 9.3x by our estimate. However, it is slightly lower than 10.2-10.7x peer transaction EV/ebitda multiples provided by SATS’ financial advisor,” Chen points out.

Other than a weakening air cargo demand outlook amid a potential global recession, Chen adds that the current market sentiment – which is expected to be weak in the near-term – may not be in favour of equity raising.

“Based on the median forecast by Federal Reserve (Fed) officials, the Fed is expected to hike benchmark rates to as high as 4.6% in 2023, from the current level of 3%-3.25%. The rate hike expectation has led to investors staying on the sidelines as they wait to buy shares at cheaper valuations,” he says. “We caution that the weak stock market sentiment may not be in favour of SATS’ planned equity raising and may lead to sell-offs of SATS shares ahead of the equity raising.”

In his report, Chen has lowered his target price estimate to $3.82 from $4.20.

“We have hiked our weighted average cost of capital (WACC) applied by 50 basis points from 7.5%-8.0% to account for the upward pressure of risk-free rates. Based on our sensitive analysis, our target price for SATS would be lowered to $3.50 if a WACC of 8.5% is adopted,” he says.

Chen has kept his earnings estimates unchanged so far as the proposed acquisition is still in its early stages, with uncertainties pertaining to SATS’s equity financing plan.

As at 1.39pm, shares in SATS are trading 81 cents lower or 20.93% down at $3.06, a 52-week low.

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