SATS – Phillip
Buy for the attractive yields
•Robust aviation statistics in Singapore
•TFK’s contribution likely to improve sequentially
•Divestment of Daniels Group a positive development
•Upgrade recommendation to Buy with unchanged target price of S$2.73
Robust aviation statistics in Singapore
SATS reported aviation statistics in Singapore that were slightly above our expectations. Passenger related data continued to register robust growth in line with growing traffic at Changi Airport. Unit Meals produced grew at a slower pace than passengers handled at 3.6%y-y. We view this as a reflection of the growing market share of LCC traffic at Changi Airport, which has lower demand for inflight meals than its full service peers. However, volume for Cargo/Mail processed was weak with marginal growth in the quarter.
TFK’s contribution likely to improve sequentially
SATS’s inflight catering subsidiary in Japan, TFK Corp, is likely to report a significant sequential improvement for the quarter. Following the Earthquake in March, flight traffic in Japan had been improving sequentially. As a proxy to the performance for this subsidiary, TFK’s key customer, Japan Airlines (JAL), reported a 36% increase in average monthly international traffic for the first two months of 2QFY12 (July & August) over 1QFY12.
Divestment of Daniels Group?
SATS acknowledged recent speculation on the possible divestment of Daniels Group, but caution that discussions are not definitive and may not lead to an eventual sale. Due to its limited synergy with the rest of the Group, we view a divestment of Daniels Group as a positive development for SATS. However, the price paid by potential acquirers might be low given the weak market conditions and difficult operating environment in the UK. An eventual sale could trigger a special dividend payout for shareholders.
Valuation & Conclusion
We kept our earnings estimates unchanged pending the announcement of its 2QFY12 results, but see upside risk to our forecasts with the better than expected aviation statistics in Singapore and improving traffic conditions in Japan. For the quarter, we expect SATS to report profits of S$35mn on sales of S$505mn. In valuing the stock of SATS, we used a DCF model (WACC: 8.6%; terminal g: 1%) to arrive at our target price of S$2.73. SATS’s share price declined significantly after our downgrade in July 11 and at the current market price, SATS would generate attractive dividend yields of 6% in FY13-14E after its earnings bottom out in FY12E. Hence, we upgrade our recommendation to Buy, expecting total return of 28% over the next 12months.