SATS likely to face rising cost pressures

This prompts some analysts to downgrade the stock; other concerns include integration of new acquisition TFK Corp

GROUND-handler SATS is expected to face intensifying cost pressures from rising food prices and potential competition from the entry of a third ground-handler at Changi Airport, prompting some analysts to downgrade the stock this week.

For the third quarter ended Dec 31, 2010, SATS posted a 4.1 per cent year-on-year drop in net earnings to $51.2 million on the back of higher costs.

Revenue rose marginally, up 1.5 per cent to $440.9 million, as gains from its aviation revenue were offset by a fall in non-aviation revenue, which was hurt by the weaker British pound as well as a three-week cut in the accounting period for its UK-based food manufacturer Daniels Group.

Analysts flagged worsening inflationary pressure on food materials as a key risk.

‘Although management strives to pass on cost increases to its customers and broaden its food sources, we believe there would likely be a time lag,’ DBS Group Research said in a research note.

Another concern is the integration of its latest acquisition, TFK Corporation. Last year, SATS announced that it was acquiring a 50.7 per cent stake in Japan- based airline caterer TFK from Japan Airlines International Co Ltd (JALI) for 7.8 billion yen (S$121.55 million). The acquisition was completed in late December.

‘Urgent action needs to be taken on broadening TFK’s customer base beyond JAL and to rein in the cost structure, especially where wages are concerned. If all goes well, management expects TFK to be profit neutral in FY12 before turning earnings accretive in FY13,’ wrote Kim Eng analyst Gregory Yap in a research note.

Kim Eng downgraded its call on the stock to ‘hold’, trimming its target price from $3.48 previously to $2.93, while CIMB maintained its ‘underperform’ rating on SATS, with a target price of $2.42.

DBS Group Research also called a ‘hold’ on the stock and cut its price target from $3.13 to $2.94, pointing out that there is still uncertainty as to how SATS will be impacted by the entry of a third ground handler at Changi in the first quarter of this year.

SIA Engineering Company (SIAEC), a part of the Singapore Airlines group, is among those in the running, which could mean stiffer competition if SIAEC bags the licence.

However, Phillip Securities Research remained upbeat on the stock, maintaining a ‘buy’ call with a target price of $3.30.

It said that while SATS has to contend with rising food prices and the depreciating British pound, it expects SATS to benefit from the influx of tourists into Singapore as the travel industry continues to register growth.

CIMB also noted that SATS has gained a 10 per cent market share for technical ramp handling at Changi since it was granted a full apron handling licence in May last year.

The counter closed four cents lower at $2.76 on Wednesday.

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