Published December 4, 2008

SATS' move on SFI could prove the cynics wrong

By VEN SREENIVASAN
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IN TIMES like these, even the best of intentions can sometimes be brushed aside with cynicism.

The $334.5 million purchase of Singapore Food Industries (SFI) by Singapore Airport Terminal Services (SATS) - which could balloon to $509 million if the general offer is completed - has already attracted a good dose of scepticism. Some observers have dismissed it as being nothing more than an exercise by Temasek Holdings - which controls 69 per cent of SFI and has indirect control of SATS via its parent Singapore Airlines (SIA) - to dress up its books to offset paper losses on some of its other investments.

Shareholders of SATS should judge the deal on its own merits. The issue for them is whether this deal enhances the value of their asset. Is this a synergistic marriage where the enlarged entity will be much larger and more successful than the sum of its parts? Will the acquisition boost the airport ground services specialist's cash, ROE, revenue, earnings per share and, potentially, dividend payout? Finally, will the acquisition provide SATS' food services business the cushion it seeks from the volatility and vagaries of the aviation sector?

This 80 per cent SIA-owned company has been struggling with rising material costs, slowing aviation-side revenues, and lower contributions from associates. Its net earnings dropped a massive 31 per cent to $67 million for the half-year ended September. Going forward, there are few signs that the squeeze on both the top line and bottom line will ease up.

Soon after arriving to take over the helm last year, CEO and president Clement Woon realised that the company had to review its long-term business strategy to ensure sustainable growth.

SATS gets almost all its revenues from within Singapore, of which two-thirds comes from the parent SIA group. About 54 per cent comes from airport services.

During its so-named Capital Markets Day briefings for analysts and media in September, Mr Woon laid out his plans: while SATS will continue to be a key player at Changi Airport, where it controls about 80 per cent of the market, it will not be totally focused on aviation. It will expand into the more resilient and defensive non-aviation food business by working closely with hotels, hospitals and other such service providers, including the integrated resorts (IRs), the new Sports Hub and such.

Fortunately, sitting on some $740 million in cash (net cash of $528 million after debt) gave Mr Woon the necessary firepower to put his plans into action. The numbers suggest that SATS may indeed - at least on the face of it - have found the best target for its stated aims in the food business.

Incorporated in 1973, SFI is Singapore's largest integrated food company operating in food distribution, food preparation, catering, processing, and manufacturing, and abattoir and hog auctions. The company's key markets are Singapore, the UK/Ireland, Australia, New Zealand, and China. Its brands of frozen convenience foods are found on the supermarket shelves of Tesco and Sainsbury's in the UK. It sells some $200 million worth of meat and poultry every year. It also 'feeds' the Singapore Armed Forces.

Last year, Europe accounted for almost two-thirds of SFI's sales and 45 per cent of its profit, while Singapore accounted for a third of revenue and 47 per cent of profits.

The mainboard-listed company made a profit of $31.4 million last year - slightly higher than the FY06 figure of $30.2 million.

What SATS gets through SFI is immediate exposure to a resilient business with a strong global customer base. The deal will, on a pro forma basis, boost EPS by 11.3 per cent to 20.1 per cent; raise ROE by 11.5 per cent to 16.1 per cent, and hoist total revenue by 75 per cent to $1.7 billion. More importantly, SATS' footprint in the sizeable non-aviation food services segment will grow immediately, compared to years it would have taken the company to build up such a business. The takeover also instantly boosts SATS' offshore revenue to 28 per cent, and non-aviation-related food revenue to 43 per cent.

Of course, there are execution risks.

But there are execution risks in any deal of this size, where one company buys another and takes over its entire business. Such risks have to be seen in the context of the capacity of the management to execute. Given Mr Woon and his team's capabilities, and the fact that SFI is a homegrown player - sharing the same basic business philosophy as that of other local companies like SATS - should provide some comfort.

Could SATS have bought something for less? Some analysts reckon that at three times book, 13 times earnings multiple and 7.4 times Ebitda, the price is a bit rich.

Perhaps. But Mr Woon is no novice. Having earned his stripes in international companies and on a global stage, he deserves the benefit of the doubt - for now. In any case, this new CEO and his team will face their critics come May next year, when SATS unveils its final numbers and provides preliminary guidance on how the new 'baby' is doing.

As they say, the proof of the pudding is in the eating.