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SATS On Cruise Control

SATS logo SATS (SGX: S58) announced yesterday evening that it will be acquiring Singapore Cruise Centre from Temasek, one of the investment arms of Singapore’s government, through its subsidiaries: SATS Airport Services (SAS) and SATS-Creuers Cruise Services (SCCS).

SAS is wholly-owned by SATS while SCCS is joint-venture between SAS and Creuers del Port de Barcelona (Creuers) of which the ownership stake’s split 60:40.

Meanwhile, Singapore Cruise Centre is a cruise and ferry terminal operator that runs four terminals in three locations in Singapore.

Temasek will be selling Singapore Cruise Centre for S$110m and the structure of the deal is given below:

SATs graph 1

Source: SATS’ Presentation Slides

Under this structure, we’ll see SATS coughing up a total of S$106.5m to acquire the Singapore Cruise Centre. However, there might be a change as SCCS has an option to increase its stake in the cruise centre to 50.25% which expires on 31 March 2014.

If the option’s exercised, SATS’ portion of the bill will amount to S$87.9m instead, with the new ownership-structure looking something like this:

SATs graph 2

Source: SATS’ Presentation Slides

In any case, regardless of how the eventual ownership of Singapore Cruise Centre will look like, investors should still be concerned with how the company intends to fund the acquisition.

On that front, the company intends to use “internal funds” and it should not be much of an issue. SATS’ last reported balance sheet figures for its first quarter showed that it had cash on hand of S$492m while carrying total debt of only S$124m. This suggests that an acquisition of S$87.9m-to-S$106.5m would not unduly stretch its finances.

Management’s rational for this acquisition is that it can help grow the company’s core businesses of Gateway Services and Food Solutions (together, both segments made up 99.7% of SATS’ annual revenue for the financial year ended 31 March 2013)

The Gateway Services segment derives its revenue from airport and cruise terminal services, which includes ground, cargo, and baggage handling among others. Food Solutions deals with the provision of inflight catering, institutional catering, remote catering, and the manufacturing and distribution of food, just to name a few.

It’s also perhaps easy to see how Singapore Cruise Centre can easily fit into SATS’ business model, especially given the fact that the company’s been running another cruise centre – the Marina Bay Cruise Centre Singapore – since May 2012.

According to SATS, cruise passenger throughput in Singapore is projected to increase from 0.9m in 2012 to 1.5m by 2017. If that growth materialises, the company’s in a great position to capture some of that.

On a final note, the Singapore Cruise Centre earned pre-tax profits of S$16.7m in its last completed financial year. SATS is thus paying a rather low pre-tax-earnings multiple of only 6.6 for the asset which suggests that at the very least, the company’s not paying an exorbitant price.

SATS showed some numbers, given in the table below, to illustrate how financial effects of the acquisition:

Numbers for 12 months ended 31 March 2013 Before Acquisition After Acquisition After Acquisition (option is exercised)
Revenue S$1.82b S$1.864b S$1.864b
Earnings Per Share S$0.166 S$0.175 S$0.172
Net Tangible Assets S$1.12b S$1.032b S$1.047b

Source: SATS’ Presentation Slides

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