PhillipCapital has downgraded its rating on Sats from “accumulate” to “neutral”, but raised its target price from $3.02 to $3.08.
Senior research analyst Terence Chua explains that the downgrade was due to the recent run-up in price, which has moved it closer to his target price. As at Chua’s report on Dec 7, Sats’ shares last closed at $2.94. However, the analyst increased his target price as he lowered the funding costs forecast for Sats acquisition of global cargo handler Worldwide Flight Services (WFS).
Given that the company has given more clarity on its funding structure around the acquisition of WFS, “this should reduce some of the overhang on the stock,” he says.
Despite the company conducting an equity fund raising exercise of about $800 million, Chua does not expect the discount for the rights to be steep, as Sats had previously obtained an acquisition bridge facility of up to EUR1.2 billion ($1.66 billion) to fund and complete the proposed WFS acquisition.
Besides the equity raising exercise and cash from its internal resources, Sats will also fund the acquisition with a EUR700 million loan, and Chua says that he views the term loan “positively”.
The loan, he says, provides a natural currency hedge, and its interest rate of 4%-4.5% per annum is also lower than his previous expectation of 5.5%
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The loan’s interest rate is also lower than the cost of debt at WFS, which currently stands at 8-9%.
Chua also has a positive view on the outlook for Sats, highlighting that it is a “prime beneficiary” of the recovery in aviation travel.
He believes that after the consolidation of WFS, with gearing at about 58%, Sats will embark on a deleveraging cycle of its balance sheet in order to be more aligned to its optimal capital structure of under 50%.
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“We view Sats as best in class with a defensive business model and superior growth profile, due to its overseas expansion plans and the expansion of new concepts,” Chua points out.
He forecasts Sats to reach a break-even point by 2HFY2023, and expects it to resume paying out dividends by FY2024 as it reverses back into profitability.
As at 2.29pm, shares of Sats traded at 2.93, with a P/NAV ratio of 1.3 and dividend of 0%.
