SATS: In talks to sell UK business (DMG)

(BUY, S$2.18, TP S$2.53)

Looking to sell UK food business. SATS announced that it is in discussions with third parties to sell its UK businesses - the Daniels Group and International Cuisine. At the point of the announcement, no firm agreement has been made, and management made no disclosure on the price it is looking at. The UK business accounted for 21% of SATS FY11 revenue. Assuming a PBT margin of 8%, this translates to ~S$29m contribution to SATS PBT (12%). The Daniels Group was owned by SFI when SATS bought over SFI in early 2009, for ~S$490m. Assuming 50% of that acquisition price was apportioned to the UK business, a sale price of £150m (~S$305m) (according to news reports) could potentially yield SATS a gain of ~S$60m (5.4 S¢/share).

Funds for other operations? Management had always maintained that its business volume in the UK has been steady, but results have been impacted by the weak sterling. Hence, if the opportunity arises and the price is right, we think it would be better for SATS to realise its fouryear investment in the UK non-aviation food segment. While the deal to shed UK business is not cast in stone yet, there is a possibility that SATS may use the funds from the sale, to expand into other businesses, such as the cruise industry. SATS is one of the contenders to manage and operate the new International Cruise Terminal at Marina South.

Maintain BUY, lower TP to S$2.53. SATS’ share price has come off along with the market volatility in recent weeks. Margins are likely to remain under pressure for the next few quarters and growth in passenger travel and freight volumes could possibly slow down, given the global economic uncertainty. Nonethless, SATS’ business generates steady cash flows. We continue to like SATS for its steady dividends. We have adjusted our WACC assumptions (new: 7.4%, old: 6.6%), and our DCF-based TP is lowered to S$2.53 (from S$2.92 previously).