To The Moon

CGS-CIMB Research analysts have maintained their “add” rating for $SATS LTD.(S58.SI)$ Sats with a lower target price (TP) of $3.10 from $3.21 previously, with the upcoming completion of the Worldwide Flight Services (WFS) acquisition set to remove share price “overhang”.

In their report dated Feb 22, analysts Tay Wee Kuang and Lim Siew Khee say that Sats’ launch of its $798.8 million equity fund raising provides attractive buying opportunities during the rights trading period given the potential share price weakness.

Sats is tapping shareholders to raise $798.8 million via a rights issue to help fund the $1.82 billion acquisition of WFS by issuing 363 million new shares at $2.20 each, offered at a 16% discount to the theoretical ex-rights price (TERP)

Entitled shareholders will be allotted the rights to subscribe to 323 rights shares for every 1,000 existing shares held as at March 2.

The analysts note that Sats’ largest shareholder Temasek has given an undertaking to subscribe for its pro-rata entitlement (39.68%) of the rights. The remaining portion of the equity fundraising has been fully underwritten by Sats’ financial advisors and managers of the equity fundraising, namely DBS Bank, Bank of America, Citi, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB).

The acquisition of WFS is expected to be completed by April 3, as Sats announced that it had obtained all regulatory approvals for the acquisition as of 20 Feb 2023. “If the acquisition is completed by April 3, as the company expects, SATS would be able to consolidate WFS’s financial results from 1QFY2023/2024,” say Tay and Lim.

This is in line with their expectations, which they have accounted for in their FY2024 to FY2025 estimates. The analysts expect revenue to exceed $5 billion, a 151% jump, and net profit to increase by 4% to $111.4 million in FY2024 post-acquisition, with WFS contributing an estimated $3 billion in revenue and $4 million in net profit. This represents an earnings per share (EPS) dilution of some 21% in FY2024 due to the expanded share base from the rights issuance.

Their previous discounted cash flow (DCF) based TP of $3.21 had assumed a rights issuance of

314 million at $2.55 per share, a 15% discount to the then-share price of $3.00. “We cut our DCF-based TP to $3.10 due to the larger rights issuance and lower subscription price of $2.20,” explain the analysts.

“Details of the rights trading period and subscription deadline have yet to be disclosed, but we expect the rights trading period to be between the second and third week of March given the expected acquisition completion date,” they add.

They foresee share price weakness in the near term, trending towards the TERP of $2.62, which implies an FY2025 price-to-earnings ratio (P/E) of 16.6x, almost 1 standard deviation (s.d.) below its pre-Covid five-year mean of 20x, which the analysts find attractive.

Their rerating catalyst is a higher contribution from WFS, while downside risks include the inability to refinance outstanding debt from WFS upon consolidation and a slowdown in global cargo volumes.

As at 11.26am, shares in $SATS LTD.(S58.SI)$ Sats were trading 13 cents or 4.59% down at $2.70.

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