SATS – OCBC

Robust operating data reaffirms 2Q performance

Robust aviation operating data. SATS Ltd’s recent 2QFY11 aviation operating data had lent support to our view that the group is poised to deliver another positive set of quarterly results on 2 Nov. As a note, the group registered improvement across all operating indices in the quarter (both YoY and QoQ), thanks to the recovery in the aviation industry. In particular, unit services grew 5.9% YoY as a result of increased flights from full-service and low-cost carriers. Unit meals also increased by 7.8% YoY on the back of a 10.8% YoY growth in passenger traffic, while cargo throughput rose 7.9% YoY. This is largely consistent with our Sep 17 report that SATS may potentially gain from the continued expansion in industry demand, hence turning in better financial performance for 2QFY11.

Improvements expected to continue, albeit at slower pace. According to the International Air Transport Association (IATA)’s October survey, aviation business conditions had continued to show improvements. While some airlines are starting to turn cautious in view of a modest economic growth in 2011, we note that a still-high 60% of the airlines being surveyed expect further improvement in profitability over the next 12 months (vs. 69.2% in July survey). On the passenger and cargo business front, expectations for further improvements in demand similarly appear to be moderating in light of the economic outlook and the end of restocking activity, but are

still high at 62.5-68.4% (down from 73.9-80.0% in the July survey). As such, we still expect to see further improvements in SATS’ operating performance going forward, albeit at a slower pace (in line with our FY11-12F forecasts).

Maintain BUY with S$3.30 fair value. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and excellent management. The recent launch of the first-ever city check-in and baggage acceptance service with Marina Bay Sands and contract win to provide ground handling services for SIA in Hong Kong are testaments to the group’s ability to innovate quality services and expand its market presence, in our view. We are keeping our DCF-based fair value of S$3.30 pending the release of its 2QFY11 results (cost of equity: 8.5%, terminal growth rate: 1%). At current level, we see an attractive 17.0% upside potential in the stock. As such, our BUY rating on SATS remains.

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