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SATS has for the longest time been seen as a safe and stable blue-chip stock, especially with its market dominance locally. Even such a profile could see a c.20% plummet in share price over just 2 days resulting from a single decision. Did the market overly punish SATS? Is this an opportune time to buy into SATS?  

Background

• SATS provides gateway services and food solutions across the globe 
• Share prices were historically stable and previously seen as a blue-chip dividend play 🡪 Qn: Can SATS stay relevant and continue capturing value in the long-term?  
• Share prices tanked due to covid-19 due to significant travel exposure 🡪 Qn: Is there still value to extract from covid-19 recovery? 
• Plummeted yet again with the announcement of its acquisition of WFS 🡪 Qn: Are worries over the acquisition overblown?

WFS Acquisition worries overblown?

• M&A is one of the few viable ways for SATS to truly move the needle in the fairly saturated business environment SATS play in. Relatively risky play given the acquisition size but make commercial sense 
• Transaction is expected to be EPS accretive immediately and deliver strong pro-forma financial impact, though reported figures by SATS might be overly rosy 
• Highly synergistic transaction but high execution/integration risk given that SATS has never underwent such a major transaction ‍‍
  --> Mitigated by (i) Temasek’s extensive experience with M&A, (ii) WFS’ having changed hands twice since 2006 and (iii) new management role created to oversee the acquisition ‍
• SATS is likely overpaying for WFS from a valuation multiple perspective especially if WFS is unable to maintain its current financial performance after accounting for synergies 
  --> Mitigated by (i) the deal being a private negotiation instead of a competitive public tendering process, (ii) SATS’ prior experience and M&A track record, (iii) extensive due diligence supported by an army of advisors (iv) common for strategic buyers to pay a premium ‍
• Post-acquisition, SATS will be relatively leveraged compared to industry norms due to a 3.5x increase in debt. Worrying especially with a hawkish Fed 
  --> Mitigated by (i) SATS’ strong cash generating abilities, (ii) large cash war chest and (iii) possibility of deleveraging through divestments 
• Investors over-reacting to the rights issue especially since (i) it is renounceable and thus value can be extracted and (ii) no change in fundamentals of the business caused by the rights issue 
• WFS might be affected by a short-term fall in air cargo demand stemming from a looming recession. However, air cargo demand has proven to be resilient in the long-term

Value from covid-19 recovery? 

• SATS is a prime beneficiary of aviation travel recovery with recovery upside yet to be priced in by the markets
• Stock price recovery is lagging behind much harder hit SGX-listed travel-related peers with greater travel exposure and lower sector diversification despite better financial performance 
• China’s zero-covid U-turn could be a catalyst for recovery given SATS’ Chinese exposure

Stay relevant and capture long-term value? 

• Strong base for growth, protected by a widening moat stemming from SATS’ (i) economies of scale, (ii) significant infrastructure investments, (iii) high switching cost for customers, (iv) relationship network, (v) deep industry know-how and (vi) strong reputation 
• Strong focus on investing for the future, but yet to yield significant results
• Changi Airport Terminal 5 is a significant growth driver in the long term given that it will almost double Singapore’s airport capacity

Valuation

• Standalone indicative valuation of SATS’ existing business, considering both income and market approach is roughly S$3.50 to S$3.70, assuming S$800m rights issue at 20% discount, it gives us a S$3.22 to S$3.37 TERP
• Sum-of-the-Parts via Comparable Companies Analysis using Forward EV/FY+1 Multiple yielded c.S$4.66 
• DCF using 7.47% WACC, 2.5% TGR and 9.8x EV/EBITDA exit multiple yielded S$3.51 to S$3.57
• Precedent Transaction Analysis using EV/LTM Revenue Multiple (S$4.30 to S$6.40) was less relied upon due to price inflation from control premium 
• Broker consensus is mostly still a buy call, at S$3.378 mean target price

Downside analysis

• Robust corporate governance limits downside risk and sets a strong foundation for growth. 
• Minor issues pertaining to board structure coupled with concerns over type II agency problem with Temasek as a majority shareholder
• Investment risk spanning across (i) perpetual fall in business travels, (ii) incoming recession, (iii) new covid-19 variant with Lunar New Year migration, (iv) inflationary pressure, (v) Concentration risk in Changi and (vi) Counterparty risk with airlines as customers 
• Liquidation Value Analysis reveals a maximum 85-90% downside risk

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