SATS – CIMB

Margins threat from inflation, challenging aviation sector

Turbulence ahead. We expect SATS to be swept into some turbulence ahead with headwinds arising from 1) margin squeeze from food inflation and inability to pass through costs in an environment of struggling profitability for main airline clients, and 2) the emergence of a third ground handler in Changi Airport, which could stiffen competition and further erode pricing power. At 13.7x CY12 P/E, SATS is trading slightly above its average forward P/E. A slowing aviation industry and margin pressure could spark a de-rating of its share price. We resume coverage with new forecasts, an unchanged UNDERPERFORM rating and S$2.60 target price, based on 13.1x CY12 P/E, its historical mean since 2004.

Knock-on effects of a fragile aviation industry. With 59% of revenue derived from the aviation industry, SATS’s profitability is tied to the airline industry’s performance. We have an Underweight rating on this sector as our regional transport analyst anticipates margin pressure from falling utilisation and high fuel costs. Belt-tightening among airlines could have negative knock-on effects on service providers such as SATS, which may end up being squeezed between cost-conscious customers and high food costs.

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