SATS – Phillip

Completes acquisition of 50.7% stake in TFK Corporation

Purchase price values TFK at Enterprise Value of ¥16.3bn (≈S$254mn)

EV/EBITDA of 9.4X not expensive

Revised earnings up by 0.6%, 4.4% & 4.6% for FY11E, FY12E and FY13E respectively.

We estimate that TFK will contribute 18.4% of Group sales, which could breach the S$2bn milestone in FY12E.

Maintain Buy recommendation with revised target price of S$3.48.

Completion of the acquisition of TFK. SATS announced that they had completed the acquisition of the Japan Airlines International Co Ltd’s (JALI) 50.7% stake in TFK Corporation (TFK). Although the acquisition is for a 50.7% stake in TFK, SATS effectively has voting rights of 53.8% of the company as 5.8% of the acquisition is held as treasury shares by the company.

More details revealed about TFK. The purchase price of the acquisition values TFK at an Enterprise Value (EV) of ¥16.3bn (≈S$254mn). For the financial year ended 31 Mar 2010, TFK achieved Earnings before Interest, Tax, Depreciation & Amortization (EBITDA) of ¥1.7bn (≈S$27mn) which translates to an EV/EBITDA multiple of 9.4X. The valuation implied is below the EV/EBITDA of similar acquisitions over the last 3 years that have an average multiple of 11.6X. SATS also revealed that the revenue of TFK for FY10 is ¥22.6bn (≈S$353mn). Based on our estimates, TFK is marginally profitable at EBITDA margin of 7.5% for FY10. Despite the strong cash of SATS (Cash & Equivalent as of 30 Sep 10: S$182.8mn), 100% of the acquisition cost (S$122mn) will be fully funded with debt.

A proxy to growth at Narita & Haneda airport. SATS stated in the initial acquisition announcement that the Ministry of Land Infrastructure, Transportation and Tourism of Japan had indicated that they intend to increase the no. of slots at Narita & Haneda Airports by 80k and 87k respectively to 300k and 447k slots by 2014. This works out to an estimated annual growth of 5-7% for Narita and 4-5% for Haneda Airport.

Valuation. We used a blended valuation of P/E, P/B & FCFE to get our revised target price of $3.48. Thus, we maintain our Buy call with forecasted total returns of 27.1% after incorporating dividends payout of 13 over the next 12 months.

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