SATS – OCBC

Broad-based growth expected in 3QFY11

Airport Services to show positive performance. We expect SATS Ltd to close its 3QFY11 on a positive note, driven by broad-based growth across its business segments. Based on latest statistics from the Singapore Tourism Board, the number of visitor arrivals to Singapore has continued to show robust performance, with a 16.1% YoY growth in Nov, thereby marking its 12th consecutive months of record arrivals. On a global scale, the air transport operating statistics as published by IATA has been equally healthy, with passenger and freight traffic registering 8.2% and 5.4% YoY growth in Nov, respectively. While the adverse weather conditions in Europe and US may have caused some setback to the year-end holiday season, we believe it has limited impact on SATS’ financial performance. As such, we expect its Airport Services segment to show positive YoY growth in 3QFY11.

Daniels Group to provide boost to Food Solutions. On its Food Solutions segment, we expect Daniels Group to give further boost to its UK operations as it enters into the seasonally stronger 2H (due to cold season). While pressure on food pricing, especially in Europe, is expected to continue, we note that SATS has in place several measures (e.g. secure longer contracts for some commodities) to tackle the inflationary pressures.

Acquisition of TFK Corporation a positive. We are also positive on SATS’ recent cash acquisition of Japan Airlines International’s 50.7% stake in TFK Corporation for JPY7.8b (~S$122m, funded through debt). We agree with management that TFK will provide SATS with synergies to its airline catering operations and access into Japanese airline catering market, especially at Narita and Haneda Airports, which are expected to see significant increase in arrival/ departure slots in the next few years. As a note, the purchase price implies a 9.4x EV/EBITDA based on its FY10 results, a discount to an average of 11.6x in similar transactions involving Japanese food/ food services companies over the last three years. For its FY10 ended Mar, it attained revenue and EBITDA of ~S$353m and S$27m respectively (forming 22.9% and 9.8% of SATS’ FY10 reported figures).

Retain BUY. We keep our FY11 forecasts intact pending the release of its 3QFY11 results but raise our FY12 revenue by 4.3% to factor in TFK’s contribution in the next fiscal year. We maintain our positive view on SATS’ growth prospects, as it is likely to benefit from continued growth in the tourism industry, and increased penetration in hospitality and healthcare sectors. Maintain BUY with S$3.31 fair value (unchanged).

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