Category: SATS
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.
SATS – Phillip
Positive Earnings, Attractive Dividends
Company Overview
SATS Ltd is a provider of Airport Services & Food Solutions with a dominant presence in Singapore’s Changi Airport. The Group also has a network of JVs across Asia and holds a majority stake in TFK Corp, an inflight catering business based in Japan.
- 9% growth in underlying net profit
- Sequentially better profitability
- Highest contributions from TFK Corp.
- Expect attractive yields of 5.5-6.1% over the next 3yrs
- Upgrade to Accumulate with TP of S$2.94
What is the news?
SATS reported a strong set of results in 2QFY13 with PATMI of S$50.3mn (+25.4%). Revenue growth was broad based (Gateway Services: +7.9%, Food Solutions: +9.3%) with notably strong contributions from TFK Corp, largely due to seasonally effects. Driven by a 0.5ppt improvement in margins, EBITDA outpaced sales growth at SATS. Outlook statement highlights near term weakness due to the expected decline in the air cargo throughput. Interim dividend was kept unchanged at 5.0cents.
How do we view this?
The results were above our expectations on marginally higher level of sales and better profitability. We expect SATS to post another quarter of stellar performance as we enter the seasonally strongest quarter for its core aviation business in Singapore.
Investment Actions?
Based on our payout ratio assumption of 90%, we estimate that the stock would yield 5.5-6.1% over the next 3yrs. We kept of DCF model unchanged, but lifted our target price toS$2.94 due to higher earnings forecasts and upgrade our rating on SATS to Accumulate.
SATS – Phillip
Positive Earnings, Attractive Dividends
Company Overview
SATS Ltd is a provider of Airport Services & Food Solutions with a dominant presence in Singapore’s Changi Airport. The Group also has a network of JVs across Asia and holds a majority stake in TFK Corp, an inflight catering business based in Japan.
- 9% growth in underlying net profit
- Sequentially better profitability
- Highest contributions from TFK Corp.
- Expect attractive yields of 5.5-6.1% over the next 3yrs
- Upgrade to Accumulate with TP of S$2.94
What is the news?
SATS reported a strong set of results in 2QFY13 with PATMI of S$50.3mn (+25.4%). Revenue growth was broad based (Gateway Services: +7.9%, Food Solutions: +9.3%) with notably strong contributions from TFK Corp, largely due to seasonally effects. Driven by a 0.5ppt improvement in margins, EBITDA outpaced sales growth at SATS. Outlook statement highlights near term weakness due to the expected decline in the air cargo throughput. Interim dividend was kept unchanged at 5.0cents.
How do we view this?
The results were above our expectations on marginally higher level of sales and better profitability. We expect SATS to post another quarter of stellar performance as we enter the seasonally strongest quarter for its core aviation business in Singapore.
Investment Actions?
Based on our payout ratio assumption of 90%, we estimate that the stock would yield 5.5-6.1% over the next 3yrs. We kept of DCF model unchanged, but lifted our target price toS$2.94 due to higher earnings forecasts and upgrade our rating on SATS to Accumulate.
Aviation Services
Qantas-Emirates tie-up
Sector Overview
The Transportation Sector under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT, ComfortDelGro) & Aviation Services (SIA Engineering, ST Engineering, SATS).
- Qantas is shifting its European hub from Singapore to Dubai
- A mix bag for SIA
- Mildly negative in the near term for SIAEC & SATS
- We caution against overreacting to the news
What is the news?
Qantas announced a strategic 10yrs partnership with Emirates that would see the Australian carrier shift its European hub from Singapore to Dubai. Consequently, Qantas would terminate their 17yrs long business alliance with British Airways. Qantas would also withdraw its Singapore to Frankfurt route that had been underperforming.
A mix bag for SIA
Strategically, this implies that competition for traffic between Europe and Australia would be stiffer with the new alliance between two of its major competitors. However, we opine that it also implies less competition for European customers travelling to Singapore. Hence, we see this development as a mix bag for SIA.
Minimal near term impact for SATS & SIAEC
This move by Qantas has tactical and strategic implications for the aviation service providers, SIAEC & SATS, under our coverage. We see this as mildly negative for the aviation service providers as the termination of flight services would result in lower work volume for both companies. However, we estimate that the shifting of flights to Dubai would account for less than 2% of flight traffic at Changi Airport and caution against overreacting to the news.
The Qantas Group is the 2nd largest user of Changi Airport, after the SIA Group, but only after including significant traffic from Jetstar Asia. We believe that Asia remains an important market for the Qantas Group and would continue to be an important part of their growth strategy. In fact, Alan Joyce, Qantas’s CEO, mentioned “Qantas will increase dedicated capacity to Singapore and re-time flights to Singapore and Hong Kong to enable many more ‘same day’ connections across Asia.” Bloomberg news subsequently reported this capacity growth to Changi Airport at 25%. Hence, this expected increase in traffic growth at Changi could actually be positive for the aviation service providers!
Strategic implications for SIAEC & SATS
There are also concerns over a potential loss of contracts with Qantas, as the second largest service provider at Changi Airport, dnata Singapore, is part of the Emirates Group. We acknowledge this as a longer term risk, but opine that near term effects are limited. In particular, we see little risk in the near term for SATS as the company had recently renewed their contract (inflight catering, laundry services, ground and cargo handling) with Qantas in 1QFY13. Contract information for SIAEC is not available.
SATS – Phillip
Visit to MBCCS
Company Overview
SATS Ltd is a provider of Airport Services & Food Solutions with a dominant presence in Singapore's Changi Airport. The Group also has a network of JVs across Asia and holds a majority stake in TFK Corp, an inflight catering business based in Japan.
- New cruise centre contribution immaterial in near term
- Highly variable cost structure
- Dividend yields of 5-6% remains attractive
- Maintain Neutral with TP of S$2.65
What is the news?
We visited the Marina Bay Cruise Centre Singapore (MBCCS) that is operated by SATS's new JV, SATS-Creuers. Salient points from the visit:
- Infrastructure. 80 check-in counters, max capacity of 6,800 passengers at any time, 25 coach bays, 327 carpark lots, walkway linkage to MRT station expected to be ready in 2014, minimal retail space.
- Customers. Royal Carribean International, Celebrity Cruises, Holland America Lines, Princess Cruises, Silversea Cruises and Azamara Cruises. Hosted 8 vessels since opening in May 2012. Another 60 plus vessels scheduled till the end of FY13E.
- CruiseFly. 5 airlines (Singapore Airlines, SilkAir, Air China, China Eastern & China Southern) currently offer CruiseFly services.
- Staff. 12-15 permanent staff with extra workload handled by subcontractors.
- Financials. Not expected to reach revenue of S$10mn in the near term, highly variable operating cost structure.
How do we view this?
Our view remains unchanged and do not think that this new venture would have a material impact to SATS and its stock in the next 1-2 years. The ability to handle larger vessels is the only significant advantage that MBCCS has over the existing cruise terminal facility at Harbourfront Centre.
Investment Actions?
While we maintain our Neutral view on the stock, our Singapore Sector Strategist remains overweight on the Aviation Services sector for their sustainable yields. On our projections, SATS would yield 5-6% over the next 3 years.