SATS special dividend payout is possible

Nomura - TP S$3.30

Disposes of Daniels Group in the UK

Key points:-
1) Sold to Hain Celestial Group, a natural / organic food company.

2) Disposal netted it 159pounds / SGD 321mn - Slightly over its net asset value, however after FX and transaction costs taken into account, it recorded a loss of SGD4.7mn. There is an additional 13mn pounds "bonus" deferred consideration to be received by SATS above the 159mn pounds if Daniels Group meets certain EBITDA targets (19.2mn pounds) over the next 2 years post the sale.

3) Potential cut to our earnings are ~ 6-7% to remove Daniels Group; UK operations had contributed to weak 1Q12 earnings recently.

4) However we think this is likely to be viewed somewhat positively as 1) contributions from Daniels since its acquisition (from Singapore Food Industries) have been flat as volumes just haven't been able to offset the currency conversion impact and 2) Daniels was perceived to not have synergistic benefits to SATS (given the differences in operations between Daniels in food manufacturing and SATS in food catering)

Other investment reasons for SATS now:
1) Stock has corrected post the entry of a 3rd ground handler in Changi (ASIG) and the TFK catering firm acquisition from JAL in Japan (which was acquired about 3 months before the earthquake). ASIG only has a license for ground handling, and not aviation food catering at Changi; airline customers typically want full-suite providers, also besides SIA, no other airline comprises >5% of revenue. For Japan, TFK has 40-45% market share in growing Haneda airport, while for Narita, new potential customers could include the budget carriers in future (AirAsia Japan / Qantas-JAL JV)

2) Dividend yield - 5% for FY12F (YE March '12), 6% for FY13F on a 60% forecast payout (FY11 payout excluding special dividends was c. 64%, historical levels were 74-78%. So our numbers could be bottom end if company decides to revert back to historical levels prior to FY11)

3) Potential new earnings stream from 2H12F if it is awarded the contract to manage the new international cruise terminal (results of the bid are expected soon)

4) SATS is the most likely beneficiary of SIA's plan to set up a long-haul low cost carrier, in our view, as airlines tend to stick to one handler/caterer for their fleet (SIA contributes 30-35% of SATS group revenue, the SIA contract expires 1 Oct 2014), and potentially could benefit if Qantas is allowed to set up a premium airline based in Singapore (according to Today online Oct 24, the Qantas plan is being discussed at the ministerial level in Singapore) - our Qantas analyst in his Aug 16 report highlighted the fleet size could be 11 A320s. Qantas is an existing customer of SATS and SATS could potentially tap into this source of demand.


PhillipCapital - TP S$2.73

What is the deal?
SATS announced the divestment of its UK Non-Aviation Food business (Daniels Group) to The Hain Celestial Group, Inc, for a consideration of approximately S$321mn (£159mn) representing EBITDA multiples of 9.8X and P/E multiples of 19.6X. The finalized amount of the sale could vary, depending on a set of EBITDA targets achieved by Daniels Group over the next 2yrs. As of end of 1QFY12, Daniels Group has a NAV of S$297.9mn and NTA of S$75.2mn. As mentioned in our latest update on 17Oct11, we view the divestment of Daniels Group as a positive move due to its limited synergies with the rest of the SATS Group. Furthermore, with the weak economic outlook for UK and the weakening of the GBP, Daniels Group could be facing inflationary pressure and low profitability in the near term.

Cash balance swells upon completion
Upon completion of the deal, we estimate SATS would have a sizeable amount of cash balance available for use (1QFY12 cash: S$306mn, less: Dividends paid on 17Aug: S$133mn, add: S$321mn: equals S$494mn). Unless the company takes on a significant acquisition, we believe that SATS would likely dish out some special dividends, as holding such a big cash balance would hurt the efficiency of its balance sheet.

Strategy for growth remains unchanged
During the conference call to discuss the divestment, SATS’s management maintained that they are still interested in acquisitions in businesses within their core competency. Key geographical areas cited include Asia Pacific & Middle Eastern region, where SATS have a significant presence.


UBS - TP S$3.15

We think this disposal will have a positive impact on SATS share price because:
1) This business was not strategic to its core business
2) It is in part of the world where the growth is likely to be slow in the foreseeable future
3) it has been facing headwinds in terms of higher commodity prices and its ability to pass on cost to the customers and
4) a special dividend payout is possible

Low returns on cash Daniels contributed about 6.3% to SATS net profits last year. SATS is already cash rich and if no use is found for the cash, we estimate our 2012 forecast may have to be revised down by 5.5%. This is because the idle cash will have very low return in these low interest rate environment.

If the proceeds are dividend out, it will amount to S$0.27 per share, an 11% yield. As the company already has an estimated net cash position of S$135m before this transaction, we suspect some payout from this deal is possible. It however has not indicated anything except to say that it will take into consideration potential for expansion (acquisition) before undertaking any capital management.


OCBC - Fair Value S$2.41

Maintain HOLD. Using our previous target P/E of 14.5x on our adjusted earnings forecast over the next four quarters, we arrived at a fair value of S$2.12 (versus S$2.36 previously). Furthermore, the S$321.1m of cash proceeds from the sale of Daniels works out to be S$0.29 per share. Adding the cash proceeds to our fair value, SATS has a total value of S$2.41 per share, or 0.4% lower than its current price. Thus, we maintain our HOLD rating on SATS ahead of the release of its 2Q12 earnings.