Sats has given better clarity on how it plans to fund what it calls the “transformational opportunity” of bringing Worldwide Flight Services (WFS) under its wings. At its 1HFY2023 ended September results briefing on Nov 9, Sats said that the acquisition will cost $1.8 billion, and will be funded by a rights issue of not more than $800 million, term loans of about $700 million, and $320 million from internal cash resources.
In its Sept 28 announcement, Sats says that through cross-selling, network expansion and deeper e-commerce cargo partnerships, the combined entity is expected to capture meaningful run-rate ebitda synergies above $100 million.
However, investors seemed to worry that the acquisition will require a dilutive call on capital. This sent the share price plunging the following day from $3.87 to $3.07 on Sept 29.
The share price, barely recovered from the pandemic over the last couple of years, dipped even further to as low as $2.54 on Oct 25, lower than its previous five-year low of $2.58 on March 23, 2020, before recovering somewhat to close at $2.67 on Nov 23.
For investors who do not yet hold Sats, is the stock now an attractive buy? Or might there be further dips to come as the company deals with a higher debt load?
Analysts generally agree that the WFS acquisition will benefit Sats in the long term, even though they are more careful about the near-term prospects.
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Chu Peng of OCBC Investment Research (OIR) has kept her “buy” rating but has cut her target price by about 30% from $4.72 to $3.26. She agrees that WFS, as a global leader in cargo handling, is a complementary portfolio for Sats to own. “Investors with a long-term investment horizon may stay invested in Sats,” she says. However, she warns that the potential rights issue remains an overhang and will weigh on its near-term share price performance.
PhillipCapital’s Terence Chua, who did not cover Sats before the WFS announcement, initiated coverage on Nov 21 with a call to “accumulate” and a target price of $3.02, which is pegged to 18.5x Sats’ FY2024 ending March 2024 earnings, one standard deviation below its historical average. “We believe the latest clarity on its funding structure will alleviate some of the overhangs on the stock from the uncertain funding structure,” he says.
He has modelled a three for 10 rights issue scenario at an issue price of $2.29, which is at an estimated 15% discount to its closing price of $2.68 on Nov 18, to arrive at a theoretical ex-rights price (TERP) of $2.60.
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Chua says Sats is now at an “inflexion point” on the back of the recovery of the aviation industry, and is projected to break even by 2HFY2023 ending March 2023. “We view Sats as best in class with a defensive business model and superior growth profile due to its overseas expansion plans and the expansion of new concepts.”
Sats, with its strong cash flow generation and defensive balance sheet, ticks another box for Chua. With an estimated free cash flow of $150 million for FY2024, Chua says Sats can support its dividend payout and also deleverage following the acquisition. Chua estimates that the acquisition will drive up the company’s net debt to equity from 2.8% in FY2022 to 38.5% for the current FY2023, before reducing it to 29.3% for FY2024.
Nomura’s Global Markets Research analysts Ahmad Maghfur Usman and Divya Thomas say that the deal “elevates Sats as a global leader”. While they have kept their “neutral” view on the stock, their target price of $4.94 is the highest among all analysts with an active, updated coverage of the stock.
The Nomura analysts note that the company considers this funding plan to be optimal. While the company is evaluating loan proposals from the banks, Sats’ management expects the terms to be not too different from its existing debt.
UOB Kay Hian’s Roy Chen notes that with the acquisition, his investment thesis on Sats has changed. For years, with its dividend payout at 70% to 80% of its earnings, Sats is seen as a stable yield play. With the acquisition, Sats will be a stock offering a better balance of growth and yield, says Chen, who has a “buy” call and a $3.08 target price on the stock.
