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PhillipCapital starts Sats at 'accumulate' with TP of $3.02

Felicia Tan
Felicia Tan11/21/2022 03:15 PM GMT+08  • 3 min read
PhillipCapital starts Sats at 'accumulate' with TP of $3.02
Sats is one of Asia’s leading providers of food solutions and gateway services.
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PhillipCapital analyst Terence Chua has initiated coverage on Sats with an “accumulate” recommendation. The analyst has also given the company a target price of $3.02.

“We peg Sats to a P/E of 18.5x FY2024, which is -1 standard deviation (s.d.) below its historical average,” Chua writes.

Sats is one of Asia’s leading providers of food solutions and gateway services. Operating in countries across the Asia Pacific (APAC), the UK and the Middle East, Sats began as a subsidiary of Singapore Airlines (SIA) before it divested from the airline group in September 2009.

In his report dated Nov 21, Chua says it views Sats as the “best in class” with its defensive business model and superior growth profile due to its overseas expansion plans and the expansion of new concepts.

“We have modelled for SATS to reach breakeven point in 2HFY2023, with the group turning profitable in FY2024,” he writes.

“We believe this will be driven by air travel recovering to [around] 80% of pre-Covid levels by the year end and the group benefitting from operating leverage of its business,” he adds. “With the group turning profitable, we expect the group to resume the payout of dividends in FY2024.”

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Sats, which also recently provided clarity on its funding structure for the acquisition of Worldwide Flight Services (WFS), will reduce the overhang on the company, notes Chua.

“We believe the latest clarity on its funding structure will alleviate some of the overhang on the stock from the uncertain funding structure,” he says.

On Nov 17, Sats held a hybrid dialogue session with the Securities Investors Association (SIAS). During the session, Sats clarified that its rights issue for the acquisition will not exceed $800 million. The rest of the funds will be funded by term loans of $700 million and internal cash.

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“We modelled a three for 10 rights issue scenario at an issue price of $2.29 ([at an estimated] 15% discount to last close) to arrive at a theoretical ex-rights price (TERP) of $2.60,” Chua adds.

Looking ahead, Chua is remaining “positive” on the outlook of Sats, seeing the company as a “prime beneficiary” of the recovery of aviation travel.

“Post-consolidation of WFS, with gearing at [around] 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%,” he says.

Furthermore, the analyst likes 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 [around] $150 million for FY2024, which will support its dividend payout,” says Chua.

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