SATS’ move on SFI could prove the cynics wrong

IN TIMES like these, even the best of intentions can sometimes be brushed aside with cynicism.

The $334.5 million purchase of Singapore Food Industries (SFI) by Singapore Airport Terminal Services (SATS) – which could balloon to $509 million if the general offer is completed – has already attracted a good dose of scepticism. Some observers have dismissed it as being nothing more than an exercise by Temasek Holdings – which controls 69 per cent of SFI and has indirect control of SATS via its parent Singapore Airlines (SIA) – to dress up its books to offset paper losses on some of its other investments.

Shareholders of SATS should judge the deal on its own merits. The issue for them is whether this deal enhances the value of their asset. Is this a synergistic marriage where the enlarged entity will be much larger and more successful than the sum of its parts? Will the acquisition boost the airport ground services specialist’s cash, ROE, revenue, earnings per share and, potentially, dividend payout? Finally, will the acquisition provide SATS’ food services business the cushion it seeks from the volatility and vagaries of the aviation sector?

This 80 per cent SIA-owned company has been struggling with rising material costs, slowing aviation-side revenues, and lower contributions from associates. Its net earnings dropped a massive 31 per cent to $67 million for the half-year ended September. Going forward, there are few signs that the squeeze on both the top line and bottom line will ease up.

Soon after arriving to take over the helm last year, CEO and president Clement Woon realised that the company had to review its long-term business strategy to ensure sustainable growth.

SATS gets almost all its revenues from within Singapore, of which two-thirds comes from the parent SIA group. About 54 per cent comes from airport services.

During its so-named Capital Markets Day briefings for analysts and media in September, Mr Woon laid out his plans: while SATS will continue to be a key player at Changi Airport, where it controls about 80 per cent of the market, it will not be totally focused on aviation. It will expand into the more resilient and defensive non-aviation food business by working closely with hotels, hospitals and other such service providers, including the integrated resorts (IRs), the new Sports Hub and such.

Fortunately, sitting on some $740 million in cash (net cash of $528 million after debt) gave Mr Woon the necessary firepower to put his plans into action. The numbers suggest that SATS may indeed – at least on the face of it – have found the best target for its stated aims in the food business.

Incorporated in 1973, SFI is Singapore’s largest integrated food company operating in food distribution, food preparation, catering, processing, and manufacturing, and abattoir and hog auctions. The company’s key markets are Singapore, the UK/Ireland, Australia, New Zealand, and China. Its brands of frozen convenience foods are found on the supermarket shelves of Tesco and Sainsbury’s in the UK. It sells some $200 million worth of meat and poultry every year. It also ‘feeds’ the Singapore Armed Forces.

Last year, Europe accounted for almost two-thirds of SFI’s sales and 45 per cent of its profit, while Singapore accounted for a third of revenue and 47 per cent of profits.

The mainboard-listed company made a profit of $31.4 million last year – slightly higher than the FY06 figure of $30.2 million.

What SATS gets through SFI is immediate exposure to a resilient business with a strong global customer base. The deal will, on a pro forma basis, boost EPS by 11.3 per cent to 20.1 per cent; raise ROE by 11.5 per cent to 16.1 per cent, and hoist total revenue by 75 per cent to $1.7 billion. More importantly, SATS’ footprint in the sizeable non-aviation food services segment will grow immediately, compared to years it would have taken the company to build up such a business. The takeover also instantly boosts SATS’ offshore revenue to 28 per cent, and non-aviation-related food revenue to 43 per cent.

Of course, there are execution risks.

But there are execution risks in any deal of this size, where one company buys another and takes over its entire business. Such risks have to be seen in the context of the capacity of the management to execute. Given Mr Woon and his team’s capabilities, and the fact that SFI is a homegrown player – sharing the same basic business philosophy as that of other local companies like SATS – should provide some comfort.

Could SATS have bought something for less? Some analysts reckon that at three times book, 13 times earnings multiple and 7.4 times Ebitda, the price is a bit rich.

Perhaps. But Mr Woon is no novice. Having earned his stripes in international companies and on a global stage, he deserves the benefit of the doubt – for now. In any case, this new CEO and his team will face their critics come May next year, when SATS unveils its final numbers and provides preliminary guidance on how the new ‘baby’ is doing.

As they say, the proof of the pudding is in the eating.

SATS takes SFI on its plate to spread wings

It is paying $334.5m for Temasek’s 69.68% stake; deal sparks general offer

In an effort to lessen its dependence on the volatile aviation sector, Singapore Airport Terminal Services (SATS) is buying up Temasek Holdings’ 69.68 per cent stake in listed Singapore Food Industries Ltd (SFI) for some $334.5 million.

The value of the purchase, which is already the biggest M&A deal this quarter, could balloon to $509 million if the general offer triggered by the deal results in the Singapore Airlines subsidiary picking up the entire share capital of SFI.

At 93 cents per share, the purchase price is about 3 per cent above the last traded price of SFI of 90.5 cents prior to the lunchbreak suspension yesterday.

SATS is buying SFI at about 13 times historical net earnings and 7.4 times its FY2007 earnings before interest, tax, depreciation and amortisation (Ebitda).

SATS said the purchase of SFI would give it both the scale of operations and access to wider customer segments in the non-aviation related food industry. It also envisaged an immediate expansion into new markets like the United Kingdom, where SFI has a strong presence.

SFI is one of the largest integrated food players in Singapore, specialising in importing, producing and distributing chilled and frozen meats and meals. Besides supplying food to the Singapore Armed Forces, it exports processed and chilled meats and foods to over half a dozen countries in the Asia-Pacific region.

It has a strong presence in the United Kingdom where its unit, Daniels Group, supplies juices, frozen meals and soups to supermarket chains like Tesco and Sainsbury.

Clement Woon, SATS’ president and chief executive, said the acquisition would wean his company away from the vagaries of the aviation sector, which is currently facing its most serious slowdown since 2001.

‘We have been tied too closely to the aviation market and are a slave to the airport and airline business,’ he said. ‘With this acquisition we want to ensure that we are not just a sitting duck. We are taking our fortunes into our own hands.’

The deal would also give SATS a ‘much more balanced portfolio’ than it has today, he added.

Faced with increasing costs, a slowing revenue environment, and lower contributions from associates, SATS reported a net attributable profit of $32.4 million for its July-September second quarter, down 33.5 per cent from $48.7 million a year earlier.

The results translated to a 30.6 per cent drop in first-half earnings to $66.9 million at end-September, from $96.4 million a year earlier.

But sitting on cash and near-cash holdings of some $736 million at the end of the first half, including $40 million in non-equity investments, Mr Woon had repeatedly said that his company would go on an acquisition drive to ensure long term sustainable growth and competitiveness.

SATS is financing the purchase entirely from internal reserves.

The acquisition is cash, earnings and ROE accretive.

It will boost SATS pro-forma EPS from 18.1 cents to 20.1 cents, based on FY07/08 financials, while ROE would be boosted from 14.4 per cent to 16.1 per cent. Mr Woon said that given the strong cash and cashflow of both businesses, SATS shareholders can expect even more generous dividend payouts.

The deal will significantly diversify SATS away from being a pure aviation play.

Its airport services revenue, on a pro-forma basis, would fall from 54 per cent to 31 per cent, post consolidation, while it would have a 43 per cent revenue share from non-aviation food services. Aviation food services would account for 24 per cent of revenue. In terms of geographical spread, revenue from overseas will increase from 0.3 per cent to 28 per cent.

Mr Woon envisages SATS expanding aggressively into the supply of food to non-aviation businesses like hospitals, hotels, integrated resorts and fast food chains: ‘We need to boost our core competitiveness, take control of our growth and diversify. We will now have the critical size and market presence to do this.’

This deal comes just months after SATS took 100 per cent control of Singapore-based industrial caterer, Country Foods.

Analysts seem to like the move.

‘This seems like a well thought-out move to diversify and spread risks by SATS, while also expanding its scale through its exposure to SFI’s significant customer base,’ said Vincent Ng of S&P’s Asian Equity Research.

Keith Magnus, managing director and head of Merrill Lynch’s investment banking division in Singapore (which is advising SATS) said companies with strong balance sheets and cash were well positioned to buy other synergistic businesses at fair value under the current economic conditions.

‘The acquisition of SFI is an important step in the execution of SATS’ strategy to extend its core food services business,’ he said. ‘The fit is complementary and the opportunity for synergies and cross-sell are exciting.’

SATS shareholders will vote on the deal in January, with the general offer opening in February. SIA and Temasek will abstain from voting.

SFI is being advised by Credit Suisse.