Analysts outline risks, benefits of SAHCO IPO

Sky Aviation Handling Company (SAHCO) Plc has potential to deliver 28.44 per cent capital appreciation of the current price of its Initial Public Offering (IPO) but investor also must consider downside risks that may impact the performance of the company.

Analysts at Cordros Securities Limited stated that SAHCO has strong potential to sustain growth in the years ahead given its exposure to long-term expansion of air traffic, improvement in macro environment, relatively under-geared balance sheet and its competitiveness enhanced by IATA Safety Audit for Ground Operations (ISAGO) registration.

According to the investment analysis, a valuation shows a target price of N5.97 per share for SAHCO in the immediate future, representing an upside of 28.44 per cent on its IPO price of N4.65 per share.

“We have valued SAHCO using a pure-Discounted Cash Flow (DCF) valuation methodology, evaluating the company’s assets across its ramp and cargo handling business, in addition to future investments. Our positive investment case for SAHCO centres on the fact that the company represents a long-term play on air traffic and aviation industry growth and benefits from high barriers to entry,” Cordros Securities stated.

The report, however, identified key downside risks to include weaker-than-expected macroeconomic performance, susceptibility of operations to labour action, revenue downside from potential insolvency of some airline customers and regulatory risk.

SAHCO is offering 406.074 million ordinary shares of 50 kobo each through an IPO at N4.65 per share. The IPO is an offer for sale, implying that the net proceeds of the IPO will go to the existing majority core investor in SAHCO, which is divesting partially to allow retail minority ownerships. Application list for the N1.9 IPO closes on December 19, 2018.

SAHCO was privatised by the Federal Government in 2009. Sifax Group acquired the entire share capital of the company. The Share Sale Purchase Agreement (SSPA) however,, mandates the majority core investor to divest 49 per cent of the shares of the company to the general Nigerian investing public.

The report noted that SAHCO has become somewhat of the ‘poster-child’ for privatisation, stemming from its incredible turnaround in performance in a short period since the government’s divestment.

According to the report, management of SAHCO has stated its intention of sustaining the company’s impressive post-privatisation performance, listing key strategic goals to include expansion of revenue, cost control and reduction, customer satisfaction and stability and sustainability.

The report pointed out that SAHCO has a positive long-term growth outlook citing the transformation in the Nigerian market, which appears to be promising for SAHCO.

According to the report, Nigeria’s aviation market is the third largest in Africa. Although relatively cyclical, the sector has a recorded a 10-year GDP CAGR of 9.0 per cent, almost double the national GDP CAGR of 5.0 per cent. Nigeria has huge potential to become an aviation hub for Africa, using its natural advantages such as its central location on the continent, huge population and a growing middle class.

“As the second largest aviation ground handling service provider in Nigeria, SAHCO is well positioned to benefit from the expected long-term expansion of air traffic growth and demand for travel to, from and over Nigeria and the West African region. With respect to Nigeria air traffic trends, growth is expected to rebound after a more depressed period reflective of macroeconomic development,” the report stated.

The Nigerian Bureau of Statistics (NBS) expects air traffic growth of 20 per cent for 2018 compared to 2017, on the back of improving business confidence, positive policy reforms – ease of doing business, visa on arrival – as well as development of infrastructure.

“In our view, the Nigerian market is transitioning, from an economic standpoint – following three challenging years – and 2018 and beyond appear to be promising years for SAHCO to take advantage of. Firstly, we see economic growth benefitting from higher government and private sector spending, both riding on improved revenues from crude oil. Secondly, improved oil earnings should further improve FX liquidity and sustain stability, after the volatile era,” Cordros stated.

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