SATS

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after reading the article (link below) im wondering what in the world happened to SATS. from 2015 to 2019 the EPS was about 20 cents. the article says after the WFS acqui, pro forma EPS would be 1.9 cents. so currently PE ratio is 140+? i thought the airport services world in general is >50% back from covid, why are earnings so far off? also, that numbers are already looking bad before the deal is completed is a bad sign. usually that happens after the m&a is done!

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What does all this mean for investors? On Jan 3, 2023, Sats said in a circular to its shareholders that the acquisition of WFS would result in a significant “step change” in its revenue and Ebitda (earnings before interest, taxes, depreciation and amortisation).

But Sats also provided pro forma net profit and EPS numbers that are quite different from its original announcement on the deal.

The company’s FY2022 net profit now rises from S$20 million to only S$28 million (including amortisation of intangible assets); its EPS rises less than 6 per cent, from 1.8 Singapore cents to 1.9 Singapore cents.
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Interestingly, the circular includes financial numbers for WFS not disclosed in the original announcement – numbers that show WFS fell into net losses during the first three quarters of 2022. On the face of it, the pro forma earnings numbers for Sats might have been even worse if they were prepared for the six-month period to Sep 30, 2022.
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Sats-WFS deal: Pro forma financials in circular show lower immediate boost to earnings, EPS
https://www.businesstimes.com.sg/opinion...t-earnings
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Hi BRT, there are 2 moving parts to look at.

First, the 1.8 cents EPS is based on the current reality of its existing business (excluding WFS). It is on the upturn with almost full reopening of air travel.

Second, the revised increase of EPS of only 0.1 cents EPS is the current reality of WFS business. As I mentioned previously: "WFS acquistion is coming down from a high because its profit grew tremendously during the covid boom as it is linked to air cargo. SIA cargo segment is a good proxy where utilisation and profits have fallen since the relaxation of measures. With the decline in volume due to the pandemic boom being over, Im not sure if WFS is able to replicate its EURO 66 million profits"

The new outlook is that the WFS acquistion is going to yield only a 0.1 cents EPS increase with synergy (about $11 mil profit). SATS is paying over 100 times price earnings on a business that is stagnating. Im not sure of the contractual arrangement SATS mgmt made with WFS but if there is room to renegotiate for a lower acqusition price or that there is a performance clause guranteed, then it is good; otherwise it is a very terrible corporate exercise conducted by the SATS mgmt in negotiating without safeguards.
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actually as SATS is trading at about PE 140, and it's buying WFS at about PE 100, the purchase can be seen as a value buy (at current reality of course).
- half joke -
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Taking the joke further, its s$11 million for a s$1.8 billion purchase.

That is a 163 PE, SATS is at 140 PE. So its not even a value buy
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I don't really buy this "insurance coverage" proposition because it seems like one is betting the house on insurance coverage! Big Grin

SATS has a competitive moat when it comes to its regional operations (Spore and then partnering with AirAsia @GTR in Malaysia) but one is not too sure if it can make the geographical diversification that it desires...

Sats’ WFS purchase represents short-term pain for long-term gain

Buying WFS has expanded Sats’ reach in cargo handling to Europe and America, trebling its revenue. If another pandemic were to strike, the combined entity would stand to benefit significantly by virtue of its significant presence in major airports across the Americas, Europe and Asia-Pacific.

To justify a major acquisition on the possibility of another pandemic happening may be tenuous, but the reasoning appears fundamentally sound.

https://www.businesstimes.com.sg/opinion...-term-gain
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what hurts the most is probably most SATS individual investors didnt sign up for this. maybe this acqui will be seen as a masterful move 5 years down the road, but if i imagine myself investing anytime in the last 10 years, it would be for a stable business with regulated monopoly kind of characteristics with steady dividends ideally for many years to come.
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(16-01-2023, 10:47 PM)BRT Wrote: what hurts the most is probably most SATS individual investors didnt sign up for this. maybe this acqui will be seen as a masterful move 5 years down the road, but if i imagine myself investing anytime in the last 10 years, it would be for a stable business with regulated monopoly kind of characteristics with steady dividends ideally for many years to come.

I wouldn't necessarily call this a "regulated monopoly" because CAG has signed up other ground handlers in the past. It is just that with a limited regional market (lets say ASEAN + Australia), it is not big enough and efficient scale kicks in. Of course, the incumbents also have enough clout to do price cutting to squeeze out competitors it seems.

Swissport/ASIG giving up:
https://www.asiaone.com/singapore/room-c...nd-handler

SATS and dnata (Spore) seems to be operating in a duopoly status and both of them are probably comfortable enough to maintain status quo. It is a bit like VICOM/STA in the car inspection space in Singapore - You don't need to be big. You just need to earn money.

https://centreforaviation.com/data/profi...irport-sin
https://www.aviationpros.com/ground-hand...ting-costs

Recently, I read a book by the ex-CISCO CEO John Chambers called "Connecting the dots". In his 20+ years in charge where CISCO went through thousands of acquisitions, his advice was this:

(1) Acquire for new capabilities/market transitions, not a few more percentage points of a mature market.
(2) The further geographically away, the harder the integration and the easier to have conflict.
(3) Merger of equals seldom work if the key intention is to consolidate market share, and not serve the customer better.

Learning from the CISCO CEO, somehow I feel SATS hit all the 3 red lines above... Big Grin
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