SATS – CIMB

Ready for take-off

We turn positive on SATS, prompted by a breakthrough in Changi Airport’s volumes intertwined with a recovery in profit margins as food inflation peters out. Benefitting from booming air travel in Singapore, SATS offers stable earnings growth and yields of over 4%.

We upgrade it from Neutral to Outperform, with catalysts expected from its margin recovery and continued air-traffic strength. We lift FY14-15 EPS by 1% for higher volumes and raise our target price, now on 16.8x CY14 P/E, 1 SD above its 8-year mean (from 14.4x, 8-year mean). We believe our higher valuation can be justified by breakthrough volumes and better margins.

Volumes at a new high

A breakthrough in the number of flights handled by Changi Airport prompts us to revisit SATS, the airport’s dominant ground handler. In Nov, Changi Airport handled an average of 920 flights per day, crossing the 900 mark for the first time ever. We were previously wary of a margin contraction and cautious on volume growth, as flights handled appeared to have levelled out at around 880 per day. The recent breakthrough is evidence of success in the airport’s measures to improve air traffic.

Margins have bottomed out

SATS’s profit margins have also bottomed out, we believe. Easing food inflation leaves room for further margin expansion. 2Q13 profit margins were the best in six quarters as food inflation tapered off. We see a further easing in food inflation and productivity gains. SATS’s core net profit margin has the potential to improve 0.4% pt to 9.9% in FY13, in our estimation. Margins could grow further in FY14 if food inflation is kept at bay.

Upgrade to Outperform

We upgraded SATS from Underperform to Neutral last quarter on evidence of a margin recovery. We now upgrade it to Outperform, seeing stronger-than-expected air traffic through Singapore as an additional catalyst.

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