Cruise or Fly, Still a Buy

Tourism boom in Singapore. Recent visitor statistics have shown an encouraging uptrend despite the volatile economic situation stemming from the European debt crisis. Tourists have not only continued to make Singapore one of their preferred destinations (2011 visitor arrivals +13% YoY), but also increased their spending, leading to an 18% YoY growth in tourist receipts to SGD22.3b for 2011. Together, these figures support the notion of a sustainable tourism boom that Singapore is currently experiencing and which SATS is well-placed to benefit from.

Aviation passengers dominate growth. The aviation visitor segment has shown standout growth of 15% YoY to breach the 10m visitor mark for 2011, backed by the proliferation of budget airline flights to-and-from Singapore. SATS’ key market segment remains the aviation-related space (84% of FY3/12 revenue), and with the Singapore Tourism Board forecasting a further 10% increase in visitor arrivals for 2012, the outlook remains rosy for the company.

Cruise terminal in infancy but a good complement. SATS’ JV with Creuers (SATS-Creuers) to operate Singapore’s newest Marina Bay Cruise Centre welcomed its first vessel on 26 May 2012. While we believe that significant earnings contributions will only accrue to SATS in the medium term, we remain positive that this foray into the cruise terminal operating business will only serve to widen its expansion capabilities within the gateway services space.

Maintain BUY, don’t miss the bumper dividend. Though mindful of the risks ahead for SATS, our optimism continues to be buoyed by its resilient earnings, healthy balance sheet and attractive dividend yields. We maintain our BUY recommendation and target price of SGD3.04, based on 17x FY3/13F earnings. Investors buying in now stand to enjoy the bumper dividend of SGD0.21 per share, which goes ex-dividend on

31 July.

A REASONABLE START TO FY13

•Strong passenger growth in Changi

•Air freight volumes down

•Minimal contribution from MBCCS

Passengers and aircraft up but freight down at Changi

In Changi Airport Group’s (CAG) recently-announced operating statistics for Apr 2012, passenger movements at the airport increased 13% YoY to 4.2m on the back of a 9% YoY climb in aircraft movements to 26,410. However, air freight volume continues to slide, falling 5% YoY to 148,243 tonnes. Despite CAG’s mixed operating statistics for Apr 2012, it bodes well for SATS Ltd (SATS) going into the first month of FY13, since ~70% of its Gateway services revenue is derived from passenger and aircraft handling.

Air freight volumes also down in Hong Kong

Hong Kong International Airport (HKIA) also released lower freight volume in Apr 2012, with cargo handled at HKIA easing 1% YoY to 327,000 tonnes. With the fall in SATS’ share of associates’ profit in FY12 primarily attributed to the fall in freight volumes in Hong Kong and Vietnam, the latest freight number from HKIA should mean SATS’ share of associates’ profit is likely to remain depressed.

First cruise ship at MBCCS

Separately, The Business Times reported that the Marina Bay Cruise Centre Singapore (MBCCS), jointly operated by Creuers del Port de Barcelona S.A. and SATS, will welcome its first cruise ship, the Royal Caribbean International’s Voyager of the Seas, on 26 May 2012. An Oasis-class cruise ship, the Voyager of the Seas will be the largest ship to homeport in Asia in 2012 and, short of docking at a container port, it can only dock at MBCCS in Singapore due to its size. However, SATS expects revenue from MBCCS to grow to ~S$10m only in FY16 or FY17. Thus, MBCCS is unlikely to see meaningful contribution to SATS’ financials in the foreseeable future.

Maintain HOLD

We maintain our fair value estimate of S$2.55/share and HOLD rating on SATS.

Stable aviation business

With the disposal of its UK business in 3QFY12, SATS recorded a marginal decline in 4QFY12 PATMI (1.2% YoY) to S$50.1m. Excluding the UK business, SATS managed to achieve a 10.0% YoY growth in 4QFY12 EBIT, even as revenue rose 7.8% YoY. Its Food Solutions business (particularly the aviation-related segment) would benefit from the improving tourism and air travel in the region, helped by a still-healthy regional economy. This could be somewhat offset by expected weakness in the cargo segment, mainly due to the ongoing economic slowdown in Europe and the US. SATS had announced a special dividend of 15 S¢/share for 4QFY12. Including the interim and final dividends (5 S¢ and 6 S¢ respectively), total dividends for the year would amount to 26 S¢/share. As we roll-forward our earnings estimates, our DCF-based TP is revised to S$2.57. Maintain NEUTRAL.

Expect stability to continue, with some growth. Revenue from SATS’ aviation business (excluding TFK) was rather stable over the past few quarters, registering flat QoQ growth. This was even as the global economy was going through much uncertainty during that period. Demand in the cargo segment is expected to remain weak over the next two quarters. With the growing popularity of LCCs and improving regional tourism, we are estimating flat growth in SATS’ Airport Services division (which includes ground handling services and cargo). Growth in its Food Solutions business, which includes the stable non-aviation related business, is likely to be helped by improvements at TFK.

Maintain NEUTRAL. Given the global economic uncertainty, we are estimating FY13 earnings to grow 8.1% to S$184.7m. The ICT is expected to be operational in the next month, but positive contribution is only likely in FY14. We continue to like SATS for its stability and strong balance sheet (net cash of 28.3 S¢/share). However, at S$2.60, SATS is trading at 15.6x forward P/E, compared to its historical average of 14.5x.

Stable aviation business

With the disposal of its UK business in 3QFY12, SATS recorded a marginal decline in 4QFY12 PATMI (1.2% YoY) to S$50.1m. Excluding the UK business, SATS managed to achieve a 10.0% YoY growth in 4QFY12 EBIT, even as revenue rose 7.8% YoY. Its Food Solutions business (particularly the aviation-related segment) would benefit from the improving tourism and air travel in the region, helped by a still-healthy regional economy. This could be somewhat offset by expected weakness in the cargo segment, mainly due to the ongoing economic slowdown in Europe and the US. SATS had announced a special dividend of 15 S¢/share for 4QFY12. Including the interim and final dividends (5 S¢ and 6 S¢ respectively), total dividends for the year would amount to 26 S¢/share. As we roll-forward our earnings estimates, our DCF-based TP is revised to S$2.57. Maintain NEUTRAL.

Expect stability to continue, with some growth. Revenue from SATS’ aviation business (excluding TFK) was rather stable over the past few quarters, registering flat QoQ growth. This was even as the global economy was going through much uncertainty during that period. Demand in the cargo segment is expected to remain weak over the next two quarters. With the growing popularity of LCCs and improving regional tourism, we are estimating flat growth in SATS’ Airport Services division (which includes ground handling services and cargo). Growth in its Food Solutions business, which includes the stable non-aviation related business, is likely to be helped by improvements at TFK.

Maintain NEUTRAL. Given the global economic uncertainty, we are estimating FY13 earnings to grow 8.1% to S$184.7m. The ICT is expected to be operational in the next month, but positive contribution is only likely in FY14. We continue to like SATS for its stability and strong balance sheet (net cash of 28.3 S¢/share). However, at S$2.60, SATS is trading at 15.6x forward P/E, compared to its historical average of 14.5x.

SATS net profit dips slightly in fourth quarter

Airport terminal services operator SATS yesterday reported net profit fell 1.2 per cent in its fiscal fourth quarter from the corresponding period in the previous year to S$50.1 million despite revenue rising 7.8 per cent to S$433.3 million.

SATS said turnover benefited from growth in passenger volumes and flights, with operations at its Tokyo Flight Kitchen unit recovering from the triple disasters in Japan.

But net profit fell because it had benefited in the previous period from a contribution from Daniels Group, whose operations had since been discontinued. Excluding that item, net profit rose 11 per cent, it said. For the full fiscal year ended March 31, net profit fell 12 per cent to S$170.9 million even as revenue grew 24.1 per cent to S$1.68 billion.

Looking ahead, SATS said passenger traffic at Changi Airport would likely increase on the back of growing regional traffic as the Singapore Tourism Board has projected moderate growth in visitor arrivals of between 13.5 million and 14.5 million this year.

However, SATS warned that weakness in cargo demand would likely continue, especially for the next two quarters.

It added that a stronger Singapore dollar might affect the performance of some overseas associates and joint ventures.

SATS shares rose 2.4 per cent to S$2.61 yesterday after the results announcement.