SGX Yield Stock

Completes acquisition of 50.7% stake in TFK Corporation

•Purchase price values TFK at Enterprise Value of ¥16.3bn (≈S$254mn)

•EV/EBITDA of 9.4X not expensive

•Revised earnings up by 0.6%, 4.4% & 4.6% for FY11E, FY12E and FY13E respectively.

•We estimate that TFK will contribute 18.4% of Group sales, which could breach the S$2bn milestone in FY12E.

•Maintain Buy recommendation with revised target price of S$3.48.

Completion of the acquisition of TFK. SATS announced that they had completed the acquisition of the Japan Airlines International Co Ltd’s (JALI) 50.7% stake in TFK Corporation (TFK). Although the acquisition is for a 50.7% stake in TFK, SATS effectively has voting rights of 53.8% of the company as 5.8% of the acquisition is held as treasury shares by the company.

More details revealed about TFK. The purchase price of the acquisition values TFK at an Enterprise Value (EV) of ¥16.3bn (≈S$254mn). For the financial year ended 31 Mar 2010, TFK achieved Earnings before Interest, Tax, Depreciation & Amortization (EBITDA) of ¥1.7bn (≈S$27mn) which translates to an EV/EBITDA multiple of 9.4X. The valuation implied is below the EV/EBITDA of similar acquisitions over the last 3 years that have an average multiple of 11.6X. SATS also revealed that the revenue of TFK for FY10 is ¥22.6bn (≈S$353mn). Based on our estimates, TFK is marginally profitable at EBITDA margin of 7.5% for FY10. Despite the strong cash of SATS (Cash & Equivalent as of 30 Sep 10: S$182.8mn), 100% of the acquisition cost (S$122mn) will be fully funded with debt.

A proxy to growth at Narita & Haneda airport. SATS stated in the initial acquisition announcement that the Ministry of Land Infrastructure, Transportation and Tourism of Japan had indicated that they intend to increase the no. of slots at Narita & Haneda Airports by 80k and 87k respectively to 300k and 447k slots by 2014. This works out to an estimated annual growth of 5-7% for Narita and 4-5% for Haneda Airport.

Valuation. We used a blended valuation of P/E, P/B & FCFE to get our revised target price of $3.48. Thus, we maintain our Buy call with forecasted total returns of 27.1% after incorporating dividends payout of 13￠ over the next 12 months.

Acquisition of 50.7% of TFK completed

Maintain Underperform. SATS has completed its acquisition of JAL’s 50.7% stake in TFK for ¥7.8bn (S$122m). After the acquisition, TFK and its subsidiaries will become subsidiaries of SATS. The acquisition was valued at 9.4x historical EV/EBITDA vs. an average of 11.6x for Japanese food and food service company transactions in the past three years. Our FY11-13 EPS estimates have been lifted by 1-3% to account for the new earnings contributions. We continue to rate SATS an Underperform due to its rich valuations (vs. historical) and risks of competition in ground handling. Our target price has been raised to S$2.42 (from S$2.35) following our earnings adjustments, still based on 12.4x CY12 P/E (its historical mean since Mar 03). De-rating catalysts could include competition from a third ground-handler at Changi Airport, and greater inflationary pressures, in our view.

The news

Acquisition completed. SATS has completed its acquisition of JAL’s 50.7% stake in TFK for ¥7.8bn (S$122m). The acquisition was satisfied with cash and funded through debt. SATS now owns 504.2K shares of TFK and has voting rights of 53.8%. TFK and its subsidiaries, K.K. Inflight Foods, Narita Dry Ice K.K., New Tokyo Service K.K., Tokyo Flight Kitchen Restaurantes LTDA and TFK International (N.Z.) Limited, have become subsidiaries of SATS.

Leading in-flight caterer in Japan. Founded in 1959, TFK is the leading airline caterer in Japan, with a strong presence at Narita and Haneda airports. TFK serves around 30 international airlines. In May, Japan’s Ministry of Land Infrastructure, Transportation and Tourism laid out the growth strategies for Narita and Haneda airports, intending to increase annual slots at both airports by 80K and 87K respectively to 300K and 447K by 2014.

Acquisition valuation. The acquisition was valued at a historical EV/EBITDA of 9.4x. According to management, in the past three years, transactions involving Japanese food and food service companies averaged 11.6x EV/EBITDA. For FY10 (March yearend), TFK’s revenue was ¥22.6bn (S$353m), while its EBITDA was ¥1.7bn (S$27m).

Recap of acquisition rationale. SATS aims to expand its gateway services and food solutions business by exploiting opportunities locally and overseas. The TFK acquisition will give SATS access to Japan’s airline catering market, help to strengthen its relationships with key customers such as JAL and Qantas, and widen its customer base. Moreover, management sees synergies with its existing airline catering business.

Valuation and recommendation

FY11-13 EPS estimates raised by 1-3%. Our FY11-13 EPS estimates have been raised by 1-3% as we take into account earnings contributions from the TFK acquisition. While the acquisition is a positive step in SATS’s expansion and diversification plan, the impact is rather insignificant for now.

Maintain Underperform; target price raised to S$2.42 (from S$ 2.35). We continue to rate SATS an Underperform due to its rich valuations (vs. historical) and risks of competition in ground handling. Our target price has been raised to S$2.42 (from S$2.35) following our earnings adjustments, still based on 12.4x CY12 P/E (its historical mean since Mar 03). De-rating catalysts could include competition from a third ground-handler at Changi Airport, and greater inflationary pressures, in our view.

SATS shows great timing

SINGAPORE Airport Terminal Services’ (SATS) efforts to beef up its portfolio through the acquisition of a major stake in Japan-based airline caterer TFK Corporation seem to have been timed quite nicely.

After confirming it was in talks last week, the ground-handler announced on Monday that it is purchasing – via its wholly owned subsidiary SATS Investments – a 50.7 per cent stake in TFK from Japan Airlines International Co (JALI) for 7.8 billion yen (S$122.3 million).

TFK, which has operations at Japan’s Narita and Haneda Airports, serves about 30 international airlines. TFK’s other shareholders include its founder, the Nomaguchi family, with 43.2 per cent, and Air France with 0.3 per cent.

The acquisition, for starters, gives SATS a foothold in the Japanese catering market at a time when Japan’s aviation industry is expected to receive a boost from the recent opening of a new international terminal at Haneda Airport, which will enable more international airlines to touch down in Tokyo. Japan’s Ministry of Land Infrastructure, Transportation and Tourism had released projections earlier this year, declaring its intent to increase yearly slots at Narita and Haneda Airports by 80,000 and 87,000 respectively to 300,000 and 447,000 slots by 2014 – which suggests further potential for SATS to grow its business by leveraging on TFK.

Synergies

One research house pointed out, however, that SATS could have been a little more circumspect with its acquisition price. While it is unclear at this point exactly how the acquisition will boost SATS’ earnings, the net asset value for JALI’s shareholding in TFK was $90 million for the financial year ended March 31, 2010.

SATS is looking to complete the purchase by this month but also said the acquisition is not expected to have any material impact on the group’s earnings per share or net tangible assets per share for the current financial year ending March 31, 2011.

The acquisition will also mean synergies, especially when it comes to areas such as procurement and training, which should help the company keep a lid on costs.

Aside from its gateway services business, SATS also provides food solutions such as in-flight catering, food distribution and industrial catering.

Liberalising

But perhaps more importantly, the buy comes at a point when Changi Airport is poised to welcome a third ground-handler – another attempt at liberalising the sector after heavy losses forced Swissport International to pull out in March last year.

Four companies have been shortlisted so far, including Jetstar and SIA Engineering Company (SIAEC), and the third ground-handler will join incumbents SATS and Changi International Airport Services in the first quarter of 2011.

While SATS currently nets the bulk of the business at Changi Airport, the entry of a new player could mean stiffer competition down the line, especially if that player turns out to be SIAEC, given that SIAEC is part of the Singapore Airlines (SIA) group.

If nothing else, this latest acquisition will ‘help to diversify SATS’ customer base and reduce its reliance on the SIA Group (which accounts for some 60 per cent of SATS’ aviation revenue)’, CIMB pointed out in a report.

So for SATS, which has been talking about growing its core businesses both in and out of Singapore, it appears that the opportunity to snap up TFK couldn’t have come at a more opportune moment.