Valuations in-line with industry, public equity need time to digest
- SATS announced acquisition of Worldwide Flight Services (WFS) at an EV of S$3.11bn and equity of S$1.74bn, indicating EV/EBITDA and P/E 9.7x/45.1x.
- EV/EBITDA valuation in line with industry median of c.11x over the past decade. Post de-leveraging, P/E could be more palatable at 16.9x.
- Worst case of S$1.7bn in EFR suggests TERP of S$3.49 at c.10% downside.
- On a longer-term basis, if executed well, this could be a pivotal point for SATS to transform into a global leader. Maintain Add and TP of S$4.47.
Evaluating valuations of the deal
SATS’s acquisition price translates to an EV/EBITDA and P/E of 9.7x/45.1x based on TTM financials disclosed as at Mar 2022. In terms of EV/EBITDA, valuation is in line with historical average of 9.8x, according to Menzies (Fig. 1). Menzies was also subsequently acquired by Agility at a 10.7x valuation. We also believe the opportunity to 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. Post-acquisition, SATS will have leading positions in 5 of the top 10 airports across North America, EMEA and APAC (Fig. 2), and handle more than 50% in global cargo volume.
Upside potential from future refinancing
Currently, WFS owns c.S$1.67bn of debt, which is serviced at an interest rate of 7-8% p.a. Pro-forma net gearing stands at 0.43x. With SATS’s strong balance sheet and credit history alongside strong shareholder support, we believe it has room to recapitalise WFS. Assuming a lower interest rate of c.4% post refinancing, interest savings could amount to c.S$67m per year, making the acquisition more palatable at 16.9x. However, such savings are expected to only be reaped in FY3/25 due to clauses on existing bonds preventing premature refinancing.
What to do with the stock
With the Purchase Price Allocation (PPA) undetermined and uncertainty to normalisation of earnings profile of WFS, we believe it will be premature to bake in forecasts of the combined entity. Investors can also take heed from the Equity Fund-Raising (EFR) illustration provided by SATS, which we believe to be worst-case scenario for fund-raising structure, with the entire acquisition consideration of S$1,820m (i.e. €1,313m) to be funded via combination of a S$1.7bn rights issue at S$2.79 subscription price and S$120m from internal cash reserves, leading to a Theoretical Ex-Rights Price (TERP) of S$3.49 (Fig. 3). 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. Long-term shareholders may stay invested although near-term share price could weaken on macro uncertainty. Maintain Add with an unchanged TP of S$4.47. We await clarity on the funding profile of the WFS acquisition. Re-rating catalysts: strong demand growth; downside risks: global recession.
