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.

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.

It gets bitter before it turns sweeter

The TFK earnings drag. SATS Ltd reiterated that the recently acquired TFK Corporation is not expected to have a material impact on FY12 earnings, but we are unconvinced. TFK’s output volumes have trended lower since early 2010 due to Japan Airlines International’s (JAL) restructuring efforts. In addition, the earthquake that hit Japan in Mar 2011 has further depressed TFK’s output volumes. In 1QFY12, excluding one-off accounting gain of S$10.1m arising from its pension obligations, TFK reported pre-tax loss of S$7m. Consensus numbers do not seem to have factored in the impact of loss-making TFK on the group. We have lowered our FY12 earnings forecast by 14.2% to reflect the drag of TFK on the group’s earnings. Our new FY12 net profit of S$171.3m is the second lowest on the street and 13.2% lower than consensus.

TFK restructuring and turnaround. Post-earthquake, management maintained its original target of turning TFK profitable by FY13. Management’s optimism comes from the end of JAL’s restructuring and route cuts and Japan’s new focus to increase air travel in Tokyo’s two main airports. Given SATS’ good execution track record, there is a good chance of management coming good on their target. We have correspondingly increased our FY13 earnings forecast by 1.4% to S$212.6m.

Challenging outlook. Management has warned of challenging times in the coming months as a result of the Eurozone debt crisis and the downgrading of USA’s credit rating. While Asia’s economies are comparatively better, SATS continues to face the pressure on rising wages and food costs. With more than 60% of its revenue being aviation-related, SATS’ earnings and share price will take a beating if the global economy and air travel suffer.

Downgrade to HOLD. SATS’ share price has fallen 23% from a recent high in Jan 2011. As a result, SAT’s implied forward P/E has fallen below one standard deviation lower than the average of the last two years. While consensus FY12 earnings of S$197m do not seem to have factored in the negative impact of loss-making subsidiary TFK in the near term, the market seems to be pricing in the expectation. With the headwinds facing the aviation sector and global economy, the street’s implied P/E of 15.3x on FY12 earnings also seems a little too optimistic. Instead, we assigned a 14.5x P/E, or one standard deviation below its two-year historical average, on our earnings forecast over the next four quarters to arrive at a fair value of $2.36 (versus $3.02 previously). Given an upside of 3.6%, we downgrade SATS to HOLD.

SATS unit enters into food catering JV with OCS Ventures

SATS Ltd announced on Thursday that its wholly owned subsidiary SATS Investments Pte Ltd (SIPL) will be incorporating a joint venture company in Singapore with investment holding company OCS Ventures Pte Ltd.

The new company, of which SIPL will hold a 51 per cent stake, will provide food and allied services to clients operating in remote areas around the world.

It will start off by focusing on clients from the oil, gas and marine, mining and industrial and infrastructure construction in the Asean, China, Australia, New Zealand and Papa New Guinea.

Acting CEO of SATS Tan Chuan Lye said that the joint venture will be an ‘important milestone in our strategy to extend the reach of our non-aviation food solutions business’.

‘This partnership will enable SATS to leverage our strong food solutions capabilities and uncompromised food safety standards to remote catering clients,’ he added.

The company will also ‘benefit tremendously from Singapore’s impeccable record of corporate governance and established reputation as a preferred global hub for multinational companies in sectors such as oil and gas, and marine’, said Raju Shete, founder and president of OCS Ventures.

Family could be why SATS CEO quit

Clement Woon desires to be closer to family

Clement Woon’s decision to resign as the CEO of SATS could have been largely due to his desire to be closer to his family.

While Mr Woon did not elaborate or directly address the reasons for his sudden resignation last Friday, when asked by shareholders at the company’s AGM yesterday, he alluded to the fact that he had spend too much time away from his family who are living in Switzerland.

Mr Woon’s resignation, coming just four years after he took over at the helm of the airport ground services company, then expanded and diversified its business quickly, shocked many market insiders, coming as it did at a critical time for SATS. Besides facing a significant cost crunch which is shaving its profit margins, the company will soon be facing off against a new competition on its home ground with the impending arrival of a third ground services operator, American ground services giant Aircraft Service International Group.

Mr Woon joined SATS in November 2007, after 10 years in Switzerland with spatial surveying company Leica Geosystems.

At the time, he said that part of his reason for returning to Singapore was to be with his son, who was due to serve national service. He would have completed NS by now.

He and his wife, a homemaker, also have three daughters aged 18, 16 and 11. The plan was for the family to reunite when the children finish their schooling. Mr Woon has said before that leaving them behind in Kanton St Gallen – a village in Heerbrugg, Switzerland – had been very tough.

Addressing shareholders yesterday, SATS chairman Edmund Cheng said that the company had put out a global search for a new CEO, and assured them that the search would cover both external and internal candidates.

SATS’ foods business veteran Tan Chuan Lye has been appointed the interim CEO.

On Tuesday, SATS disappointed with a lower-than-expected first-quarter profit of $42.5 million, 4 per cent down from the previous year. This would have been even lower at $37 million if not for a $10.1 million writeback for lower pension obligations for its Japan based unit, TFK.

Analysts are cautious about the outlook for the company. Kim Eng maintained a ‘hold’ with a reduced target price of $2.46.