SATS – OCBC

Ready to soar new heights

Stronger recovery in aviation demand… The International Air Transport Association (IATA) has halved its 2010 loss forecast for airlines to US$2.8b last week (from Dec 2009 forecast of US$5.6b), as improvements driven by economic recovery in Asia-Pacific and Latin America proved to be stronger than expected. According to the association, passenger and cargo demand, which fell by 2.9% and 11.1% respectively in 2009, are now expected to grow by 5.6% and 12.0% in 2010, significantly better than its previous forecasts of 4.5% and 7.0%. We expect SATS Limited to directly benefit from this stronger recovery in aviation demand due to its strong presence in the Asia-Pacific region.

…and growth in visitor arrivals likely to boost SATS' airport services. We also note Singapore Tourism Board (STB)'s recent optimistic projection for 2010 visitor arrivals, which is expected to hit between 11.5-12.5m, up by as much as 30% from 2009 number of 9.7m. We believe it further supports our view that SATS is likely to enjoy stronger demand for its airport services this year.

Food solutions segment expected to fare better as well. For its non-aviation business segment, we believe SATS would also register improved performance in the upcoming quarters, underpinned by strength at Singapore Food Industries (SFI), Country Foods and potential business opportunities in the tourism and hospitality sectors. In the upcoming 4QFY10, margins from SFI are also expected to maintain at current levels as it benefits from lower cost by consolidating commodities at larger quantities, and as Daniels Group enters into a seasonally stronger quarter.

Timely establishment of medium term notes. With the timely establishment of a new S$500m multi-currency MTN programme on 9 Mar, SATS is also well-positioned for all growth opportunities in our view. This as the net proceeds arising from the issue of Notes will be used for general working capital, capex, refinancing purposes as well as long-term strategic investments/acquisitions.

Maintain BUY with S$3.27 fair value. SATS is currently trading at 16.2x FY10F EPS and 14.2x FY11F EPS. We expect the stock to re-rate towards our DCF-based fair value of S$3.27 (or near its high cycle PER of 21x) amid a significantly stronger earnings profile (with acquisition of SFI) and brighter outlook. We believe SATS has still ample room for growth and yield improvements, both internally via synergies with SFI and externally through greater sales volume. Maintain BUY.

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