SATS – CIMB

Acquisition of 50.7% of TFK completed

Maintain Underperform. SATS has completed its acquisition of JAL’s 50.7% stake in TFK for ¥7.8bn (S$122m). After the acquisition, TFK and its subsidiaries will become subsidiaries of SATS. The acquisition was valued at 9.4x historical EV/EBITDA vs. an average of 11.6x for Japanese food and food service company transactions in the past three years. Our FY11-13 EPS estimates have been lifted by 1-3% to account for the new earnings contributions. We continue to rate SATS an Underperform due to its rich valuations (vs. historical) and risks of competition in ground handling. Our target price has been raised to S$2.42 (from S$2.35) following our earnings adjustments, still based on 12.4x CY12 P/E (its historical mean since Mar 03). De-rating catalysts could include competition from a third ground-handler at Changi Airport, and greater inflationary pressures, in our view.

The news

Acquisition completed. SATS has completed its acquisition of JAL’s 50.7% stake in TFK for ¥7.8bn (S$122m). The acquisition was satisfied with cash and funded through debt. SATS now owns 504.2K shares of TFK and has voting rights of 53.8%. TFK and its subsidiaries, K.K. Inflight Foods, Narita Dry Ice K.K., New Tokyo Service K.K., Tokyo Flight Kitchen Restaurantes LTDA and TFK International (N.Z.) Limited, have become subsidiaries of SATS.

Leading in-flight caterer in Japan. Founded in 1959, TFK is the leading airline caterer in Japan, with a strong presence at Narita and Haneda airports. TFK serves around 30 international airlines. In May, Japan’s Ministry of Land Infrastructure, Transportation and Tourism laid out the growth strategies for Narita and Haneda airports, intending to increase annual slots at both airports by 80K and 87K respectively to 300K and 447K by 2014.

Acquisition valuation. The acquisition was valued at a historical EV/EBITDA of 9.4x. According to management, in the past three years, transactions involving Japanese food and food service companies averaged 11.6x EV/EBITDA. For FY10 (March yearend), TFK’s revenue was ¥22.6bn (S$353m), while its EBITDA was ¥1.7bn (S$27m).

Recap of acquisition rationale. SATS aims to expand its gateway services and food solutions business by exploiting opportunities locally and overseas. The TFK acquisition will give SATS access to Japan’s airline catering market, help to strengthen its relationships with key customers such as JAL and Qantas, and widen its customer base. Moreover, management sees synergies with its existing airline catering business.

Valuation and recommendation

FY11-13 EPS estimates raised by 1-3%. Our FY11-13 EPS estimates have been raised by 1-3% as we take into account earnings contributions from the TFK acquisition. While the acquisition is a positive step in SATS’s expansion and diversification plan, the impact is rather insignificant for now.

Maintain Underperform; target price raised to S$2.42 (from S$ 2.35). We continue to rate SATS an Underperform due to its rich valuations (vs. historical) and risks of competition in ground handling. Our target price has been raised to S$2.42 (from S$2.35) following our earnings adjustments, still based on 12.4x CY12 P/E (its historical mean since Mar 03). De-rating catalysts could include competition from a third ground-handler at Changi Airport, and greater inflationary pressures, in our view.

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