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CGS-CIMB lowers target price on Sats after WFS funding plan revealed

Lim Hui Jie
Lim Hui Jie12/5/2022 05:11 PM GMT+08  • 3 min read
CGS-CIMB lowers target price on Sats after WFS funding plan revealed
The analysts say the $3.17 figure is based on the pre-rights issuance fair value with dilutive EPS, as a result of lower finance costs.
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CGS-CIMB analysts Tay Wee Kuang and Lim Siew Kee have maintained their “add” call on Sats, but with a lowered target price from $3.45 to $3.17 after the company announced more details of its funding structure for the planned acquisition of Worldwide Flight Services (WFS).

The analysts say their target price of $3.17 is based on the pre-rights issuance fair value with dilutive earnings per share (EPS) as a result of lower finance costs.

This is different from what they had as their base case previously, where they had assumed $350 million in hybrid securities that would have been accounted for as equity.

Sats will fund the acquisition via $320 million in cash, around $700 million via three-year Euro-denominated term loan with an all-in cost of 4.0%-4.5% per annum, and $800 million via an equity fund raising exercise (EFR).

The EFR is likely to take place in the first quarter of 2023 after the conclusion of an EGM which will be held for shareholders to approve the proposed acquisition.

Under Tay and Lim’s model, they expect a potential earnings dilution of about 5% in 2024, on the assumption that the net interest savings from the potential refinancing of WFS’s outstanding debt and the increase in financing cost from the term loan will be negligible,

See also: Sats reveals funding structure for WFS acquisition

This is also assuming an unchanged earnings contribution of $36 million per annum in FY2022.

They acknowledge, however, that their expectation of the financial impact does not take into account potential synergies that can be reaped from the group that could drive better profitability moving forward.

The analysts see potential cost savings from debt repayment, given the company’s strong cash generation.

See also: Analysts see 'resilient' results for MLT's 3QFY2023 although Citi sees 'negative' share impact on forex weakness

This is underpinned by their estimated forecast of about $750 million in EBITDA for the combined entity in 2024.

Separately, Tay and Lim point out that they believe the discount for Sats’ equity fund raising will not be as steep as the previously illustrated 30%, given that Sats has access to an acquisition bridge facility if the markets are not conducive for such an exercise.

“We believe that the acquisition of WFS is of strategic importance for Sats to accelerate its growth within the cargo and ground handling business, but think there could be some near-term headwinds from slower cargo volumes globally as economies reopen and consumption patterns shift from goods back to services,” the analysts write.

Sats shares closed Dec 5 at $2.84, up 6.37% or 17 cents higher for the day.

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