Month: June 2011
SATS – Phillip
Widely anticipated award of 3rd ground handling licence
•New entrant has extensive experience and presence in US and Europe
•Market size at Changi has room for growth
•Not material news as it is widely anticipated by the market
•Maintain Buy recommendation with target price of S$3.41.
CAG awards 3rd ground handling licence
Changi Airport Group (CAG) announced the award of a 3rd ground handling licence to Aircraft Services International Group (ASIG). The licence for ASIG will be for 10yrs, which is at the top end of the proposed tenure of 5-10yrs. ASIC would be licensed to provide the full suite of passenger handling, apron handling and cargo handling services that is similar to the services provided by incumbent SATS and CIAS. The award of this licence had been widely anticipated by the market, after the exit of Swissport in early 2009. However, the proposed commencement of operations for the successful bidder had been delayed for a couple of times, originally expected to be in mid-2010, but subsequently to 1Q2011. In the announcement by CAG, there was no indication of the expected commencement of operations for ASIG.
ASIG
ASIG, subsidiary of London listed BBA Aviation PLC, is a US-based aviation service provider with significant presence in US and Europe. In Asia, ASIG only provides fuelling services in Bangkok, Thailand. ASIG had been in the business of providing ground handling services since 1947 and handles more than 4mn flights/yr across its network
What is at stake for SATS?
The gateway services segment comprises of 32% of revenue and 28% of operating profits for SATS in FY11. SATS handled 103.7k flights, 35.4mn passengers and 1,495k tones of cargo/mail in FY11, which was a growth of 6.2-7.2% over FY10.
Market size at Changi Airport
Changi Airport handled 42mn passenger movement in 2010, a growth of 13% over 2009. There is certainly room for growth at the airport, particularly in the budget segment, which had seen strong demand in recent years. We estimate that the airport is currently operating at c.57% of its maximum capacity.
How does this change the scene?
We opine that the most important success factor for the new entrant would be to achieve sufficient scale of operation. Swissport’s attempt to undercut the competitors resulted in an average decline in ground handling rates of 15% since they commenced operations. However, continued losses was followed by the economic slowdown and resulted in the exit of Swissport in early 2009. We do not think that ASIG will pose an immediate threat to SATS for the following reasons:
• Long term contracts with key customer. SATS currently has a ground handling contract with SIA till Sep 2012, followed by an automatic extension till Sep 2014.
• Unlikely to compete solely on rates. From the experience of Swissport, it is unlikely that ASIG would pursue a strategy of aggressively cutting rates. However, we believe that the incumbents would likely keep their rates competitive in order to retain their airline customers. Furthermore, with the abrupt exit of Swissport, airlines could be wary of engaging services from a new entrant.
• Advantage with scale and scope. SATS currently has a market share of 80% at Changi Airport and would certainly enjoy better economies of scale than the new entrant. Furthermore, SATS also provides Inflight catering services and had been awarded the technical ramp handling licence last year. This would allow SATS to provide a more holistic range of services to its customers.
Conclusion & Valuation
We kept our estimates unchanged as we had already factored in flat ground handling rates into our forecasts for the next 5yrs. We believe that the award of this 3rd ground handling licence had been widely anticipated by the market and is not expected to have a material impact on SATS. In valuing the stock of SATS, we used a DCF model (WACC: 7.6%; terminal g: 1%) to arrive at our target price of S$3.41. After including forecasted dividends of 17.3¢ over the next 12months, we expect total return of 35.9%. Hence we keep our Buy call on SATS.
SATS – Phillip
Widely anticipated award of 3rd ground handling licence
•New entrant has extensive experience and presence in US and Europe
•Market size at Changi has room for growth
•Not material news as it is widely anticipated by the market
•Maintain Buy recommendation with target price of S$3.41.
CAG awards 3rd ground handling licence
Changi Airport Group (CAG) announced the award of a 3rd ground handling licence to Aircraft Services International Group (ASIG). The licence for ASIG will be for 10yrs, which is at the top end of the proposed tenure of 5-10yrs. ASIC would be licensed to provide the full suite of passenger handling, apron handling and cargo handling services that is similar to the services provided by incumbent SATS and CIAS. The award of this licence had been widely anticipated by the market, after the exit of Swissport in early 2009. However, the proposed commencement of operations for the successful bidder had been delayed for a couple of times, originally expected to be in mid-2010, but subsequently to 1Q2011. In the announcement by CAG, there was no indication of the expected commencement of operations for ASIG.
ASIG
ASIG, subsidiary of London listed BBA Aviation PLC, is a US-based aviation service provider with significant presence in US and Europe. In Asia, ASIG only provides fuelling services in Bangkok, Thailand. ASIG had been in the business of providing ground handling services since 1947 and handles more than 4mn flights/yr across its network
What is at stake for SATS?
The gateway services segment comprises of 32% of revenue and 28% of operating profits for SATS in FY11. SATS handled 103.7k flights, 35.4mn passengers and 1,495k tones of cargo/mail in FY11, which was a growth of 6.2-7.2% over FY10.
Market size at Changi Airport
Changi Airport handled 42mn passenger movement in 2010, a growth of 13% over 2009. There is certainly room for growth at the airport, particularly in the budget segment, which had seen strong demand in recent years. We estimate that the airport is currently operating at c.57% of its maximum capacity.
How does this change the scene?
We opine that the most important success factor for the new entrant would be to achieve sufficient scale of operation. Swissport’s attempt to undercut the competitors resulted in an average decline in ground handling rates of 15% since they commenced operations. However, continued losses was followed by the economic slowdown and resulted in the exit of Swissport in early 2009. We do not think that ASIG will pose an immediate threat to SATS for the following reasons:
• Long term contracts with key customer. SATS currently has a ground handling contract with SIA till Sep 2012, followed by an automatic extension till Sep 2014.
• Unlikely to compete solely on rates. From the experience of Swissport, it is unlikely that ASIG would pursue a strategy of aggressively cutting rates. However, we believe that the incumbents would likely keep their rates competitive in order to retain their airline customers. Furthermore, with the abrupt exit of Swissport, airlines could be wary of engaging services from a new entrant.
• Advantage with scale and scope. SATS currently has a market share of 80% at Changi Airport and would certainly enjoy better economies of scale than the new entrant. Furthermore, SATS also provides Inflight catering services and had been awarded the technical ramp handling licence last year. This would allow SATS to provide a more holistic range of services to its customers.
Conclusion & Valuation
We kept our estimates unchanged as we had already factored in flat ground handling rates into our forecasts for the next 5yrs. We believe that the award of this 3rd ground handling licence had been widely anticipated by the market and is not expected to have a material impact on SATS. In valuing the stock of SATS, we used a DCF model (WACC: 7.6%; terminal g: 1%) to arrive at our target price of S$3.41. After including forecasted dividends of 17.3¢ over the next 12months, we expect total return of 35.9%. Hence we keep our Buy call on SATS.
M1 – Kim Eng
Stay close to home
Event
• By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season saw no upgrades, whether in terms of forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a
highly attractive yield of 7%. BUY.
Our View
• For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, the company paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at its capex trends, we think there is the possibility of a similar payout this year. We upgrade our dividend forecast for FY11 from 14.5 cents a share to 18 cents a share, assuming a 100% payout ratio against the typical 80%.
• M1’s Long Term Evolution (LTE) network, which is Singapore’s first 4G highspeed (300Mbps) wireless network, will be fully deployed by 1Q12. While a major item, it has always been part of the company’s upgrading plans. Therefore, we do not expect this year’s capex to stray beyond management’s guidance of $100m. With just $12m capex in 1Q11, the trend for the rest of the year should stay similarly tame. This should
enhance M1’s ability to pay more dividends.
• Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of non‐Apple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBN‐related sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.
Action & Recommendation
Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.
M1 – Kim Eng
Stay close to home
Event
• By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season saw no upgrades, whether in terms of forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a
highly attractive yield of 7%. BUY.
Our View
• For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, the company paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at its capex trends, we think there is the possibility of a similar payout this year. We upgrade our dividend forecast for FY11 from 14.5 cents a share to 18 cents a share, assuming a 100% payout ratio against the typical 80%.
• M1’s Long Term Evolution (LTE) network, which is Singapore’s first 4G highspeed (300Mbps) wireless network, will be fully deployed by 1Q12. While a major item, it has always been part of the company’s upgrading plans. Therefore, we do not expect this year’s capex to stray beyond management’s guidance of $100m. With just $12m capex in 1Q11, the trend for the rest of the year should stay similarly tame. This should
enhance M1’s ability to pay more dividends.
• Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of non‐Apple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBN‐related sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.
Action & Recommendation
Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.
SATS – DBSV
3rd Ground-Handling Licence at Changi Airport awarded to ASIG
• Long-awaited 3rd Ground Handler announced – ASIG gets 10-year licence
• Impact minimal, but competition expect to stiffen
• Lower market share for SATS has already been factored in
• Maintain HOLD and TP S$2.91 TP.
News:
Changi Airport Group (CAG) announced yesterday that it has awarded the 3rd Ground Handling licence to US based Aircraft Service International Group (ASIG), from a tender exercise which saw proposals from 3 parties. The 10-year licence allows ASIG to provide the full suite of passenger, apron and cargo handling services to airlines operating at Changi Airport. We believe the other notable contender was SIA Engineering. ASIG is a US-based ground handling, fueling, cargo and ancillary services company based in 60 cities with operations in North America, Europe and Asia. It is a wholly-owned subsidiary of BBA Aviation [BBA LN].
Our views:
Stage is set with uncertainty cleared. The award of this 3rd licence has been long awaited, as it was originally announced that the 3rd operator is “expected to commence operations by mid-2010”, in CAG’s media release on 17 Nov 2009, when it first called for tender. Furthermore, there has been market concern that SATS’ contract with SIA could be at risk if SIA Engineering wins the tender.
Impact is minimal at this stage, but more competition ahead is expected. At this point, we see minimal impact on SATS given that ASIG does not yet have any significant presence in Asia, except for a refueling operation in Thailand’s Suvarnabhumi Airport. While we believe ASIG could likely see Singapore as its first significant operation base in Asia, we do note that it would take a while before operations could be scaled up sufficiently. That said, we believe competition is likely to pick up as the new entrant establishes its foothold in this market.
We have already factored in lower market share over the next few years. The re-introduction of a 3rd ground handler is not something new as CAG had first called for submission of plans more than a year and half ago in Nov 2009. As such, we have already factored in an erosion of market share by SATS over the next couple of years. We have assumed that SATS’ market share in passenger handling, flights and cargo handled to drop by c.2ppt per year till 2013.
No changes to our forecasts at this stage. Maintain Hold, TP S$2.91.