SATS – Phillip

Divestment of Daniels Group

Divestment of Daniels Group for c.S$321mn

Exiting a difficult market with limited synergies to the Group

Margin improvement on deconsolidation of Daniels

Kept forecasts unchanged pending the announcement of its 2QFY12 results

Maintain Buy with unchanged target price of S$2.73

What is the deal?

SATS announced the divestment of its UK Non-Aviation Food business (Daniels Group) to The Hain Celestial Group, Inc, for a consideration of approximately S$321mn (£159mn) representing EBITDA multiples of 9.8X and P/E multiples of 19.6X. The finalized amount of the sale could vary, depending on a set of EBITDA targets achieved by Daniels Group over the next 2yrs. As of end of 1QFY12, Daniels Group has a NAV of S$297.9mn and NTA of S$75.2mn. As mentioned in our latest update on 17Oct11, we view the divestment of Daniels Group as a positive move due to its limited synergies with the rest of the SATS Group. Furthermore, with the weak economic outlook for UK and the weakening of the GBP, Daniels Group could be facing inflationary pressure and low profitability in the near term.

Cash balance swells upon completion

Upon completion of the deal, we estimate SATS would have a sizeable amount of cash balance available for use (1QFY12 cash: S$306mn, less: Dividends paid on 17Aug: S$133mn, add: S$321mn: equals S$494mn). Unless the company takes on a significant acquisition, we believe that SATS would likely dish out some special dividends, as holding such a big cash balance would hurt the efficiency of its balance sheet.

Strategy for growth remains unchanged

During the conference call to discuss the divestment, SATS’s management maintained that they are still interested in acquisitions in businesses within their core competency. Key geographical areas cited include Asia Pacific & Middle Eastern region, where SATS have a significant presence.

Proforma Adjustments to our forecasts

In the discussion that follows, we make adjustments to our original forecasts, prior to the divestment, and illustrate this divestment’s impact on the income statements of Daniels Group. Key assumptions in our adjustments include (1) EBITDA margin of 6-8% for Daniels Group, (2) Loss on disposal of S$4.7mn booked in FY12E (assuming fair value of sale at £159mn) and (3) Deconsolidation of accounts from end Oct 11. As shown below, deconsolidation of Daniels Group would result in a 9-19% reduction in our revenue forecasts and 5-9% reduction in our EBITDA forecasts over the next 5years. However, as Daniels Group has lower margins than the rest of SATS Group, divestment would actually result in margin uplift for the Group. Overall, the PATMI and EPS impact is expected to be a reduction of 3-6%.

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