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%.
M1 – DMG
Forget 2011, Look To 2012
We keep our BUY rating on M1 following the in line 3Q/9MFY11 results released on 17 October. We expect its fixed (fiber) revenue streams to gain momentum in 2012 as the company benefits from the wider footprint of its own NGNBN OpCo allowing for greater wholesale cost savings. The recent introduction of new bundled plans should drive stronger revenue growth through 4QFY11, coinciding with a seasonally stronger quarter and the launch of the new iPhone 4S. We like M1 as it offers arguably the strongest exposure to the NGNBN with share price supported by a sustainable dividend yield of 6-7% (80% payout policy reaffirmed) for FY11/12.
Bottleneck issues should be behind soon. We expect much of the bottleneck issues (largely at the OpenNet level) afflicting the slow take-up of the NGNBN services in Singapore thus far to resolve by end- 2011/1Q2012. M1 indicated at the recent 3QFY11 results call that interest on its entry level fiber plan (Singapore’s cheapest offering at SGD59/mth for 100Mbps) has picked-up with greater awareness in the market. M1 said 40-45% of the 16k fiber customers recorded as at 3QFY11 were added during the quarter, translating into some 7k new additions although it was not able to guide on its share of the market. This contributed to the 77% y-o-y growth (+9% q-o-q) in fixed services revenue for the quarter. It believes there are at least 12k broadband users on cable/ADSL coming out of contracts which presents a good potential catchment. M1 deployed its own NGNBN OpCo in Sept with its geographical footprint widening to 100% by end- 2011 from 50% currently. The company saves up to SGD31 in wholesaling cost per customer by linking its fiber customers across its own OpCo than the government mandated Nucleus Connect.
All is not lost without Vodafone. M1 was not able to quantify the impact from the impending cessation of its 7 year Vodafone global roaming agreement. Management stressed that multiple roaming arrangements in place, including the Asian Mobility Initiative (AMI) through Axiata would still provide a fallback and the decision to not proceed with the renewal will not have a significant impact. We believe all is not lost as the Vodafone agreement entails strict volume commitments that M1 could have found prohibitive given the scale and its roaming traffic profiles, and it would be able to save substantially on fees paid to Vodafone by not renewing the partnership.
Still a BUY- underappreciated. Management has maintained capex guidance of SGD100m for FY11 with 9MFY11 run-rate at 85% (OpCo cost built into 3QFY11). We believe there is lower risk of capex surprising on the upside post FY11 even with the launch of LTE. This portends further capital management opportunity but historical precedence would suggest that M1’s management typically errs on the conservative, taking cue from external economic conditions and developments. Still, we believe the stock’s sustainable 6% dividend yield is an adored attribute in the current economic environment.
SATS – DBSV
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 – DBSV
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 – BT
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.