CGS-CIMB Research analysts Tay Wee Kuang and Lim Siew Khee have maintained their “add” call and raised their target price on Sats from $3.17 to $3.21.
They say that they expect Sats to report higher core operations from a faster-than-expected Chinese reopening, as well as a revised proforma contribution from the acquisition of global cargo handler Worldwide Flight Services (WFS).
In their Jan 14 note, Tay and Lim say that SATS’s revenue could double to $5.5 billion to $5.9 billion per annum with the acquisition of WFS.
They note that WFS’s 3QFY2022 (ended Sep 30, 2022) revenue reached EUR516 million ($736.9 million), which is 44% higher y-o-y.
This is from the acquisitions of air cargo handlers Pinnacle and Mercury in the fourth quarter of 2021, as well as organic growth.
Tay and Lim say that given a quarterly run rate of EUR500 million in revenue, this suggests that WFS could reach a revenue level of EUR 2.2 billion per annum by December 2023.
See also: Sats reveals funding structure for WFS acquisition
Furthermore, they observe that WFS’s margins remain “steady” despite labour and inflationary pressures.
Tay and Lim point out that as of 9MFY2022, WFS’s net losses came in at EUR91.3 million, of which EUR61.3 million is related to unrealised forex losses.
These losses are from WFS’s US$400 million ($527.4 million) notes, on the back of a weakened Euro and US dollar.
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As such, they say that if forex impacts were excluded, and both the Euro and US dollar was stable, WFS’s reported losses are likely to narrow to about EUR10 million in FY2022.
Excluding government grants, WFS’s gross margins have held stable at 12.7% in its 9MFY2022.
Synergies with Sats
Should the acquisition of WFS go through, the analysts see potential cost savings in refinancing and synergies between the two companies.
WFS has three outstanding bonds worth about EUR1 billion, with financing costs of about 7.5%.
The first tranche of EUR250 million notes is callable in March 2023, but Tay and Lim say the remaining EUR250 million and US$400 million notes could be refinanced by March 2024.
They have assumed refinancing rates of about 4.8%, saving about $31 million and $38 million for SATS in FY2024 (ending March 2024) and FY2025 respectively.
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On a proforma consolidated basis, WFS could double Sats’s revenue to $5.5 billion in FY2024 and $5.9 billion in FY2025 as the world’s largest air cargo handler, with volumes of 10 million tonnes per annum.
In comparison, peers like Swissport and DNATA moved about five million tonnes and three million tonnes per annum respectively, and NAS/Menzies moved about two million tonnes per annum.
The analysts factor in about $25 million to $50 million of synergies to flow through from 2024 between Sats and WFS.
This is based on Sats's previously guided potential run-rate EBITDA synergies, which are in excess of $100 million in the medium term via cross-selling, e-commerce cargo partnership and automation.
Tay and Lim sum up by saying, “In a nutshell, we estimate WFS’s net profit contribution to Sats including intangibles amortisation to amount to about $4 million and $26 million for FY2024 and FY2025 respectively.”
As such, they also raise their earnings per share (EPS) by 12% higher in FY2024 and 16% in FY2025 to reflect the faster-than-expected reopening of China starting from 2023.
Tay and Lim point out, “we believe core operations could reach 100% of pre-Covid levels by FY2025 on stronger associates and margin recovery.”
As of 4.20pm, shares of Sats were trading at $2.89, with an FY2023 P/B ratio of 2.01 and a dividend yield of 0%.
