SATS rights issue – What should investors do?

What you need to know about the SATS rights issue

Here’s a quick summary of the SATS rights issue

• SATS is offering shareholders the rights to buy 323 new shares for every 1,000 old shares, at S$2.20 each.
• All who held shares as at 5pm on 2^nd March 2023 are eligible to subscribe.
• The rights entitlements will be traded from 7 to 15 March 2023.
• Subscription and payment will close on 21 March 2023 at 5:30pm.
• The new shares are expected to be allotted and traded from 29 March 2023.
• Proceeds will be used to partially fund the acquisition of Worldwide Flight Services.

#1 The entitlement to the rights is transferable

This is a renounceable rights issue. Shareholders may sell their rights entitlement if they do not wish to subscribe to the new shares. 

These entitlements, also known as nil-paid rights (NPR) can be traded on SGX from 7 to 15 March 2023.

Shareholders may buy, sell part or all their NPRs in the market. Non-shareholders may also trade or buy the NPR to subscribe for the new shares. 

The theoretical price of the NPR is the difference between the price of SATS and the subscription price of S$2.20. That is, when SATS trades at S$2.57, NPR should trade at S$0.37. 

#2 Theoretical ex-rights price is S$2.62 per share

SATS closed at S$2.75 on 28 Feb 2023, the last trading day when SATS traded cum-rights. 

Investors who bought SATS on or before 28 Feb 2023 are entitled to subscribe to the rights. 

After accounting for the impact of the new shares at S$2.20 per share, the ex-rights price of SATS should be S$2.62 per share.

#3 The rights issue will be fully subscribed

Temasek will subscribe to all 39.7% of its rights entitlement.

The remaining 60.3% is fully underwritten by DBS, BofA Securities, Citi, OCBC and UOB. 

All 363.1m new rights shares would be traded from 29 March 2023. 

#4 The rights proceeds will fund the acquisition of Worldwide Flight Services (WFS)

The rights issue will raise S$800m for SATS. These will be used to partly fund the purchase of WFS for S$1.82b. 

SATS will pay for the balance via new debt and cash on hand.

After the rights issue and consolidating the debt at WFS, SATS’ total debt will rise to S$4.2b. 

What are reasons to be positive on the SATS rights issue? 

#1 - SATS will build a global footprint in air cargo operations.

SATS’ operations are predominantly in Singapore and Asia. WFS is a market leader in air cargo handling with a global network across 164 locations and 18 countries. The combined group will boast global air cargo footprint across Asia, Europe and North America. 

Post-merger, cargo handling will take up the lion’s share of 50% of revenue. Revenue share of food solutions will fall from 55% currently to 30%.

#2- Reduces its reliance on Singapore Airlines and Changi Airport Group

SATS derives about 80% of revenue from Singapore currently. It is a major provider of flight-related services at the Changi Airport. Its revenue is therefore closely tied to the capacity and volume operated by Singapore Airlines and the China Airport Group.

With WFS in the group, Asia’s revenue share will fall to 45%. Americas and Europe will account for 30% and 25%, respectively.

What are the risks for the SATS rights issue? 

#1 - Higher debt could push up interest expense 

SATS’ total debt will increase substantially from S$838m to S$4.2b, pushing the ratio of debt to equity to 1.6x.

With the Fed expected to keep rates high to tame inflation, SATS’ earnings outlook could be dampened by its higher interest expense. 

#2 - Cargo volume could weaken with economic slowdown

SATS handled less cargoes in the last two consecutive quarters. WFS’ cargo earnings also fell 6.4% yoy in the Dec quarter.

Cargo tonnage has weakened due to 1) fading of demand for Covid-related products; and 2) slowdown in the tech sector, and 3) higher cost of energy and material have reduced manufacturing output.

If economic conditions deteriorate and lead to recession, cargo volume would fall further.

SATS paid a premium of S$1.3b over WFS’ book value. Post-merger, the value of intangible assets in SATS’ balance sheet will amount to S$3.5b.

This amount could be amortized at a fixed rate. It could also be written-down if future earnings to be derived from these assets falls short of the current value. A potential write-down will reduce SATS’ profits.

What would Beansprout do?

SATS’s share price has fallen by more than 30% since the announcement of the acquisition of Worldwide Flight Services. 

This reflects investor concerns that higher interest expense could delay SATS’s return to profitability. With global economic growth slowing down, cargo volume could also weaken further.

However, SATS’ revenue is expected to improve with airlines adding flights to meet the rebound in travel demand. This is positive for food solutions and gateway operations at the airports. 

In the long term, the acquisition of Worldwide Flight Services could also allow SATS to build a global footprint in air cargo operations, and reduce its reliance on Singapore Airlines and Changi Airport. 

Should you invest $1,000 in SATS right now?

Before you consider SATS, you might want to compare it with other Singapore stocks exposed to the travel recovery such as Singapore Airlines and Genting Singapore. 

What you need to do as a SATS shareholder

Entitled shareholders can either:

• Subscribe for your entitlements 
• Renounce your entitlements
• Trade your entitlements on SGX during the rights trading period
• Do nothing and allow your entitlements to lapse

If you wish to subscribe for the entitlement, here’s how to do so

• For entitled shareholders who hold shares in your CDP accounts, you can subscribe via ATMs of participating banks or accepted electronic services (such as PayNow), or ARE forms to be submitted to CDP
• For entitled scripholders, you can subscribe via the provisional allotment letter to be submitted to the share registrar.
• For entitled shareholders who bought shares using CPF Investment Scheme, you may contact your CPF Agent bank.
• For entitled shareholders who bought shares using CPF Supplementary Retirement Scheme (SRS), you may contact your SRS approved bank. 
• For entitled shareholders whose shares are held through finance companies or depository agent, you may contact your finance company or depository agent. 

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