SATS – OCBC

Value in selling Daniels?

SATS confirmed it is in talks to sell Daniels. After news reports said it is looking to sell its U.K. subsidiary Daniels Group (Daniels), SATS Ltd (SATS) formally clarified via the SGX website that it is 1) presently in talks with interested parties about the potential sale of Daniels; 2) there is no certainty that the deal will be done; and 3) Daniels will remain part of SATS if a sale does not materialise. Details from the news reports and SATS’ announcement are at best sketchy. Thus, it is uncertain if the sale will happen and there is no clarity on the transaction details, except for the two price tags of GBP150m and GBP200m mentioned in news reports.

Scenario analysis of the impact of selling Daniels. There is not enough publicly available information to determine the impact of the purported sale of Daniels. Instead of speculating, our scenario analysis illustrated in Exhibit 1 explores the possible impact on SATS’ fair value. Based on three possible net margins of 5%, 7% and 9% and two possible price tags of GBP150m and GBP200m, the scenario analysis resulted in six outcomes, ranging from a low of S$2.13 to a high of S$2.41 per share. Also, SATS should be able to book a gain on the sale of Daniels if the eventual sale price is GBP150m (S$302.8m) or higher since, at the end of FY11, SATS’ UK operations had a total book value of S$302.2m.

Daniels as a part of SATS. One thing we can infer from the purported sale of Daniels is the management probably does not view Daniels as an integral part of its vision for the future. And selling Daniels makes strategic sense for the group. While Daniels contributes revenue and is profitable, it has less synergistic values than other parts of SATS and is presumably harder to manage, since its operations are primarily located in the UK. By selling Daniels, SATS will also be able to remove a low-margin business, which is also susceptible to foreign exchange gains and losses.

Maintain HOLD. Since there is not enough publicly available information to determine the impact of the purported sale of Daniels, we maintain our fair value at $2.36 per share. Our fair value currently represents a 12.4% upside; but considering that uncertain equity market conditions are likely to prevail in the near to even medium term, we maintain our HOLD rating on SATS. We would be buyers closer to S$2.00.

SATS – OCBC

Value in selling Daniels?

SATS confirmed it is in talks to sell Daniels. After news reports said it is looking to sell its U.K. subsidiary Daniels Group (Daniels), SATS Ltd (SATS) formally clarified via the SGX website that it is 1) presently in talks with interested parties about the potential sale of Daniels; 2) there is no certainty that the deal will be done; and 3) Daniels will remain part of SATS if a sale does not materialise. Details from the news reports and SATS’ announcement are at best sketchy. Thus, it is uncertain if the sale will happen and there is no clarity on the transaction details, except for the two price tags of GBP150m and GBP200m mentioned in news reports.

Scenario analysis of the impact of selling Daniels. There is not enough publicly available information to determine the impact of the purported sale of Daniels. Instead of speculating, our scenario analysis illustrated in Exhibit 1 explores the possible impact on SATS’ fair value. Based on three possible net margins of 5%, 7% and 9% and two possible price tags of GBP150m and GBP200m, the scenario analysis resulted in six outcomes, ranging from a low of S$2.13 to a high of S$2.41 per share. Also, SATS should be able to book a gain on the sale of Daniels if the eventual sale price is GBP150m (S$302.8m) or higher since, at the end of FY11, SATS’ UK operations had a total book value of S$302.2m.

Daniels as a part of SATS. One thing we can infer from the purported sale of Daniels is the management probably does not view Daniels as an integral part of its vision for the future. And selling Daniels makes strategic sense for the group. While Daniels contributes revenue and is profitable, it has less synergistic values than other parts of SATS and is presumably harder to manage, since its operations are primarily located in the UK. By selling Daniels, SATS will also be able to remove a low-margin business, which is also susceptible to foreign exchange gains and losses.

Maintain HOLD. Since there is not enough publicly available information to determine the impact of the purported sale of Daniels, we maintain our fair value at $2.36 per share. Our fair value currently represents a 12.4% upside; but considering that uncertain equity market conditions are likely to prevail in the near to even medium term, we maintain our HOLD rating on SATS. We would be buyers closer to S$2.00.

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