Special dividends in the works

• SATS sells Daniels Group for £151m

• Special dividends now a potential stock catalyst

• Expect better dividend payout but lower earnings estimates with loss of Daniels

• Upgrade to Hold TP raised to S$2.57

Daniels Group sold for £151m. SATS has sold UK food arm Daniels Group to The Hain Celestial Group Inc. for £151m, a unit it bought for approximately S$250m 2 years ago.

Potential of special dividends from Daniel’s sales proceeds. We understand from SATS that it does not require additional funding if it wins the rights to operate the new Singapore International Cruise Terminal at Marina South. Yet we believe that it is looking at various acquisition targets to expand its operations. Proceeds from Daniels work out to 27 cts per share. Assuming SATS pays half of the proceeds in special dividends (13cts per share) on top of its normal DPS of 13cts, total dividend yield could work out to 11%.

Cut earnings forecast by 2% (FY12) and 9% (FY13) on loss of contributions from Daniels. We expect disposal of Daniels to lower our revenue forecast for FY12F/FY13F by 9%/13% and profit forecast by 2%/9%. However, we expect earnings quality to improve going forward as Daniels generally yield lower margins than its core businesses.

Upgrade to Hold, TP raised to S$2.57, special dividends is a potential stock catalyst. Although loss of Daniels will impact earnings negatively, we expect other core operations to grow. With the sale of Daniels, we upgrade our core TP for SATS from S$2.20 to S$2.57 (Blended based on PE/DCF) and raise our call to HOLD.

SATS sells UK’s Daniels Group to Hain Frozen Foods for £159m

The sale will allow Daniels Group to achieve its full potential, says SATS

GROUND-HANDLER SATS Ltd has divested UK-based, non-aviation food unit the Daniels Group to Hain Frozen Foods UK for £159 million (S$321.8 million).

In a release to the Singapore Exchange yesterday, SATS said that its wholly-owned subsidiaries Singapore Food Industries (SFI) and Singapore Food Development (SFD) have entered into a share sale and purchase agreement with Hain Frozen Foods UK, a wholly-owned subsidiary of The Hain Celestial Group, for all the issued shares of S Daniels and International Cuisine (collectively the Daniels Group).

The Daniels Group – which manufactures and sells chilled drinks, ready-to-eat meals as well as fresh fruit and pudding – was acquired by SATS in 2009 as part of the latter’s takeover of SFI.

SFI is selling some 167.22 million ordinary shares in S Daniels and 1.28 million ordinary shares in International Cuisine while SFD is selling one ordinary share in S Daniels and 335,006 ordinary shares in International Cuisine.

SATS’ subsidiaries will be paid £151 million (subject to adjustments), plus potential deferred consideration of up to £13 million over the next two years assuming certain Ebitda targets are met by the Daniels Group.

Taking into account the fair value of the deferred consideration, the sale consideration is estimated to amount to £159 million in aggregate, SATS said in the announcement.

Tan Chuan Lye, acting chief executive officer of SATS, said: ‘While SATS has supported the Daniels Group’s growth since 2009 by investing in new production facilities and helping them build trading volumes with new customers, we believe that it made more sense if they were part of another company in the branded products market, who could help them achieve their full potential and growth in this space.’ He added: ‘With the Hain Celestial Group being a leading player in the branded packaged food space in the US, UK and Europe, this is a much better fit for the Daniels Group.’

For the financial year ended March 31, 2011, the Daniels Group earned a revenue of £177.1 million while Ebitda and net profit were £16.3 million and £8.1 million respectively.

According to SATS, the sale proceeds will go towards its capital base, to be used for working capital as well as to drive future growth and create value for its shareholders.

This deal comes weeks after SATS had clarified media reports which said that the group was in advance talks to sell the Daniels Group. At that time, SATS confirmed it was in talks with third parties in connection with the potential sale but also highlighted that there was no certainty of a definitive agreement.

Over the last year or so, SATS has made other investments such as taking up a 40 per cent stake in Saudi-based Adel Abuljadayel Flight Catering Company (AAFC) as well as a 50.7 per cent stake in Japan-based TFK Corporation.

A wholly-owned subsidiary, SATS Investments, has also recently entered into a joint venture with OCS Ventures to provide food and services to companies operating in remote areas – a bid for SATS to grow its non-aviation food business.

‘SATS remains focused on growing and strengthening our gateway services and food solutions businesses,’ Mr Tan said. HSBC acted as financial adviser to SATS in the disposal of the Daniels Group.

SATS sells UK’s Daniels Group to Hain Frozen Foods for £159m

The sale will allow Daniels Group to achieve its full potential, says SATS

GROUND-HANDLER SATS Ltd has divested UK-based, non-aviation food unit the Daniels Group to Hain Frozen Foods UK for £159 million (S$321.8 million).

In a release to the Singapore Exchange yesterday, SATS said that its wholly-owned subsidiaries Singapore Food Industries (SFI) and Singapore Food Development (SFD) have entered into a share sale and purchase agreement with Hain Frozen Foods UK, a wholly-owned subsidiary of The Hain Celestial Group, for all the issued shares of S Daniels and International Cuisine (collectively the Daniels Group).

The Daniels Group – which manufactures and sells chilled drinks, ready-to-eat meals as well as fresh fruit and pudding – was acquired by SATS in 2009 as part of the latter’s takeover of SFI.

SFI is selling some 167.22 million ordinary shares in S Daniels and 1.28 million ordinary shares in International Cuisine while SFD is selling one ordinary share in S Daniels and 335,006 ordinary shares in International Cuisine.

SATS’ subsidiaries will be paid £151 million (subject to adjustments), plus potential deferred consideration of up to £13 million over the next two years assuming certain Ebitda targets are met by the Daniels Group.

Taking into account the fair value of the deferred consideration, the sale consideration is estimated to amount to £159 million in aggregate, SATS said in the announcement.

Tan Chuan Lye, acting chief executive officer of SATS, said: ‘While SATS has supported the Daniels Group’s growth since 2009 by investing in new production facilities and helping them build trading volumes with new customers, we believe that it made more sense if they were part of another company in the branded products market, who could help them achieve their full potential and growth in this space.’ He added: ‘With the Hain Celestial Group being a leading player in the branded packaged food space in the US, UK and Europe, this is a much better fit for the Daniels Group.’

For the financial year ended March 31, 2011, the Daniels Group earned a revenue of £177.1 million while Ebitda and net profit were £16.3 million and £8.1 million respectively.

According to SATS, the sale proceeds will go towards its capital base, to be used for working capital as well as to drive future growth and create value for its shareholders.

This deal comes weeks after SATS had clarified media reports which said that the group was in advance talks to sell the Daniels Group. At that time, SATS confirmed it was in talks with third parties in connection with the potential sale but also highlighted that there was no certainty of a definitive agreement.

Over the last year or so, SATS has made other investments such as taking up a 40 per cent stake in Saudi-based Adel Abuljadayel Flight Catering Company (AAFC) as well as a 50.7 per cent stake in Japan-based TFK Corporation.

A wholly-owned subsidiary, SATS Investments, has also recently entered into a joint venture with OCS Ventures to provide food and services to companies operating in remote areas – a bid for SATS to grow its non-aviation food business.

‘SATS remains focused on growing and strengthening our gateway services and food solutions businesses,’ Mr Tan said. HSBC acted as financial adviser to SATS in the disposal of the Daniels Group.

Buy for the attractive yields

•Robust aviation statistics in Singapore

•TFK’s contribution likely to improve sequentially

•Divestment of Daniels Group a positive development

•Upgrade recommendation to Buy with unchanged target price of S$2.73

Robust aviation statistics in Singapore

SATS reported aviation statistics in Singapore that were slightly above our expectations. Passenger related data continued to register robust growth in line with growing traffic at Changi Airport. Unit Meals produced grew at a slower pace than passengers handled at 3.6%y-y. We view this as a reflection of the growing market share of LCC traffic at Changi Airport, which has lower demand for inflight meals than its full service peers. However, volume for Cargo/Mail processed was weak with marginal growth in the quarter.

TFK’s contribution likely to improve sequentially

SATS’s inflight catering subsidiary in Japan, TFK Corp, is likely to report a significant sequential improvement for the quarter. Following the Earthquake in March, flight traffic in Japan had been improving sequentially. As a proxy to the performance for this subsidiary, TFK’s key customer, Japan Airlines (JAL), reported a 36% increase in average monthly international traffic for the first two months of 2QFY12 (July & August) over 1QFY12.

Divestment of Daniels Group?

SATS acknowledged recent speculation on the possible divestment of Daniels Group, but caution that discussions are not definitive and may not lead to an eventual sale. Due to its limited synergy with the rest of the Group, we view a divestment of Daniels Group as a positive development for SATS. However, the price paid by potential acquirers might be low given the weak market conditions and difficult operating environment in the UK. An eventual sale could trigger a special dividend payout for shareholders.

Valuation & Conclusion

We kept our earnings estimates unchanged pending the announcement of its 2QFY12 results, but see upside risk to our forecasts with the better than expected aviation statistics in Singapore and improving traffic conditions in Japan. For the quarter, we expect SATS to report profits of S$35mn on sales of S$505mn. In valuing the stock of SATS, we used a DCF model (WACC: 8.6%; terminal g: 1%) to arrive at our target price of S$2.73. SATS’s share price declined significantly after our downgrade in July 11 and at the current market price, SATS would generate attractive dividend yields of 6% in FY13-14E after its earnings bottom out in FY12E. Hence, we upgrade our recommendation to Buy, expecting total return of 28% over the next 12months.

Buy for the attractive yields

•Robust aviation statistics in Singapore

•TFK’s contribution likely to improve sequentially

•Divestment of Daniels Group a positive development

•Upgrade recommendation to Buy with unchanged target price of S$2.73

Robust aviation statistics in Singapore

SATS reported aviation statistics in Singapore that were slightly above our expectations. Passenger related data continued to register robust growth in line with growing traffic at Changi Airport. Unit Meals produced grew at a slower pace than passengers handled at 3.6%y-y. We view this as a reflection of the growing market share of LCC traffic at Changi Airport, which has lower demand for inflight meals than its full service peers. However, volume for Cargo/Mail processed was weak with marginal growth in the quarter.

TFK’s contribution likely to improve sequentially

SATS’s inflight catering subsidiary in Japan, TFK Corp, is likely to report a significant sequential improvement for the quarter. Following the Earthquake in March, flight traffic in Japan had been improving sequentially. As a proxy to the performance for this subsidiary, TFK’s key customer, Japan Airlines (JAL), reported a 36% increase in average monthly international traffic for the first two months of 2QFY12 (July & August) over 1QFY12.

Divestment of Daniels Group?

SATS acknowledged recent speculation on the possible divestment of Daniels Group, but caution that discussions are not definitive and may not lead to an eventual sale. Due to its limited synergy with the rest of the Group, we view a divestment of Daniels Group as a positive development for SATS. However, the price paid by potential acquirers might be low given the weak market conditions and difficult operating environment in the UK. An eventual sale could trigger a special dividend payout for shareholders.

Valuation & Conclusion

We kept our earnings estimates unchanged pending the announcement of its 2QFY12 results, but see upside risk to our forecasts with the better than expected aviation statistics in Singapore and improving traffic conditions in Japan. For the quarter, we expect SATS to report profits of S$35mn on sales of S$505mn. In valuing the stock of SATS, we used a DCF model (WACC: 8.6%; terminal g: 1%) to arrive at our target price of S$2.73. SATS’s share price declined significantly after our downgrade in July 11 and at the current market price, SATS would generate attractive dividend yields of 6% in FY13-14E after its earnings bottom out in FY12E. Hence, we upgrade our recommendation to Buy, expecting total return of 28% over the next 12months.