• SATS has provided more clarity on its funding structure for the Worldwide Flight Services (WFS) acquisition. We believe the added clarity will further reduce the overhang on the stock.
• With access to an acquisition bridge facility and the rights issue underwritten, we do not expect the discount for the rights to be steep.
• Downgrade to NEUTRAL from recent run-up in price with higher target price of $3.08 (prev. $3.02). Our valuation is still pegged to 18.5x FY24e. Risks to our view include 1) Integration challenges for WFS; and 2) revenue growth continuing to lag behind expenses growth.

The news

SATS provided more details on its funding plan for the proposed acquisition of WFS.

The $700mn in term loan will comprise a 3-year Euro-denominated term loan with an all-in cost of 4-4.5% per annum based on prevailing Euribor.

The proposed rights issue is expected to be launched in 1Q23, subject to shareholders’ approval of the proposed acquisition at an EGM.

The Positives

+ Less concerned on discount of rights. With access to an acquisition bridge facility and the rights issue underwritten, we do not expect the discount for the rights to be steep. SATS had previously obtained an acquisition bridge facility of up to €1,200 million (approximately S$1,657mn) to fund and complete the proposed acquisition.

+ $700mn Euro term loan at 4-4.5% lower than our 5.5% forecast. We view the term loan positively, as it provides a natural currency hedge, and is also lower than we previously modelled. We tweaked our model slightly, taking the mid-point of the Euro term loan at 4.25% to lower our FY24e interest cost by approximately ~$7mn. The interest rates are also lower than the average 8-9% cost of debt currently borne by WFS.

Source: Phillip Capital Research - 7 Dec 2022