Exploring funding options
- In this report, we explore bear-bull scenarios of funding options for SATS’s S$1.82bn acquisition of WFS with potential TPs of S$3.05 to S$3.84.
- Our base-case funding structure: S$300m cash, 20% debt, 20% equity-linked instruments and c.40% of EFR with no strategic investors.
- Our TP of S$3.45 is based on 18x CY24F SATS’s BAU net profit as well as WFS refinanced profit. 18x is -0.5 s.d. of its 2013-2018 pre-Covid average.
Earnings downgrade as opex expected to remain elevated
Despite a strong recovery in the aviation industry, the reopening of Changi Airport Terminal 2 and 4 in 2QFY3/23F is likely to translate to higher staff costs ahead of the peak end -of year travel season, which will stall SATS’s pace of earnings recovery in the near term. As such, we cut SATS’s earnings for FY23F by 79.8% to S$6.9m, mainly to account for a wider net loss in 2Q23F. We also tone down our FY24F/25F earnings by 15.6%/17.0% as we expect lower EBIT margins of 7.1%/8.8% from 8.6%/10.8% respectively.
A base-case scenario seems palatable for long-term investors
Our base case assumes the following: (1) S$300m funded with internal cash, (2) 40% funded by hybrid instruments (c.S$728m) with 50:50 split in debt-equity classification and an interest rate of 4%, as well as (3) a 3% decline in interest rates from refinancing outstanding WFS debt of S$1,468m without the involvement of any strategic investors (Fig 1). The scenario will require an equity fund-raising of c.S$792m, which will lead to negligible EPS dilution assuming a flat-lined earnings contribution of S$36m from WFS in CY24F (ex. interest expense) and a right subscription price of 30% below current market price of S$3.00. We then derive an equity fair value of S$3.19 based on 18x consolidated earnings of SATS and WFS in CY24F (i.e. S$265.5m), translating to a target price of S$3.45 after adjustments for expanded share base post rights issuance.
Re-rating catalysts and downside risks to look out for
Although the availability of funding options can mitigate the dilutive impact to EPS from a full-on EFR, we recognise the potential downside risks given the size o f the deal and lack of transparency on WFS’s financials. The rising interest rates could erase potential finance cost savings on new debt taken up, while a slowdown in cargo volumes under a recessionary environment could hamper WFS’s profitability. Nevertheless, re-rating catalysts include potential involvement of strategic investors in WFS, reaping of operational synergies between SATS and WFS, and more favourable rights issuance conditions that will improve accretion of WFS.
Maintain Add; TP cut to S$3.45 from S$4.47
Our TP of S$3.45 is based on 18x CY24 P/E of consolidated earnings of S$265m on the back of SATS’ BAU net profit (S$200m) and WFS’s refinanced profit of S$65m. We ascribe 18x on 0.5 s.d. or 10% to SATS’s pre-Covid 2013-2018 trading range, reflecting a change in overall balance sheet position from net cash to net debt.