SATS – OCBC

Datapoints suggest another quarter of growth

Continued growth in demand. We expect SATS Ltd to deliver another positive set of results when it reports its 2QFY11 performance in Oct. The international air travel and freight markets continued to show strengthening of demand in Jul, despite uncertainties about global economic growth in 2H10. According to the International Air Transport Association (IATA), international revenue-passenger-kilometers (RPKs) and scheduled freight traffic in Jul were up by 9.2% and 22.7% YoY respectively. This follows a 11.6% YoY growth in travel market and 26.6% YoY growth in cargo traffic in Jun. More importantly, both the Asia-Pacific passenger and cargo demand continued to outperform the industry average with a 10.9% and 25.3% YoY growth in Jul. As such, we believe that SATS may potentially gain from this continued expansion in demand, given its significant exposure in the region.

Sound performance at customer side. In the announcement by its customer Singapore Airlines on Wed, we also note that the airline’s system-wide passenger carriage grew by 0.1% YoY in Aug. This marks another month of positive growth in the quarter. While the growth rate was lower than the 3.6% YoY growth clocked in Jul, this was partially due to earlier commencement of Ramadan. In Sep, we expect the passenger demand to register relatively stronger growth as Ramadan ends early in the month. For its cargo segment, we also understand that the overall traffic had continued to improve by 9.0% YoY, repeating the 8.2% YoY increase in Jul. These improvements are likely to lead to further demand for SATS’ services, and in turn better financial performance for its 2QFY11.

Integrated pig farm progressing as planned. Further to the JV agreement in May to develop an integrated pig farm in Jilin Province, China, we also note that SATS had begun construction of the 100,000sqm site. The building of the farmis expected to be completed in nine months, with an annual production of 100k pigs in the first phase. While it will not contribute to earnings in the current fiscal year, we are confident that it will provide SATS with another avenue of growth in the years ahead, considering the strong support from both the Singapore and Chinese governments.

Maintain BUY. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and generous dividend payouts. We are keeping our fair value of S$3.30 as the developments are consistent with our expectations. At current level, we see an attractive 19.1% upside potential in the stock. Maintain BUY.

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