Family could be why SATS CEO quit

Clement Woon desires to be closer to family

Clement Woon’s decision to resign as the CEO of SATS could have been largely due to his desire to be closer to his family.

While Mr Woon did not elaborate or directly address the reasons for his sudden resignation last Friday, when asked by shareholders at the company’s AGM yesterday, he alluded to the fact that he had spend too much time away from his family who are living in Switzerland.

Mr Woon’s resignation, coming just four years after he took over at the helm of the airport ground services company, then expanded and diversified its business quickly, shocked many market insiders, coming as it did at a critical time for SATS. Besides facing a significant cost crunch which is shaving its profit margins, the company will soon be facing off against a new competition on its home ground with the impending arrival of a third ground services operator, American ground services giant Aircraft Service International Group.

Mr Woon joined SATS in November 2007, after 10 years in Switzerland with spatial surveying company Leica Geosystems.

At the time, he said that part of his reason for returning to Singapore was to be with his son, who was due to serve national service. He would have completed NS by now.

He and his wife, a homemaker, also have three daughters aged 18, 16 and 11. The plan was for the family to reunite when the children finish their schooling. Mr Woon has said before that leaving them behind in Kanton St Gallen – a village in Heerbrugg, Switzerland – had been very tough.

Addressing shareholders yesterday, SATS chairman Edmund Cheng said that the company had put out a global search for a new CEO, and assured them that the search would cover both external and internal candidates.

SATS’ foods business veteran Tan Chuan Lye has been appointed the interim CEO.

On Tuesday, SATS disappointed with a lower-than-expected first-quarter profit of $42.5 million, 4 per cent down from the previous year. This would have been even lower at $37 million if not for a $10.1 million writeback for lower pension obligations for its Japan based unit, TFK.

Analysts are cautious about the outlook for the company. Kim Eng maintained a ‘hold’ with a reduced target price of $2.46.

Margins threat from inflation, challenging aviation sector

• Turbulence ahead. We expect SATS to be swept into some turbulence ahead with headwinds arising from 1) margin squeeze from food inflation and inability to pass through costs in an environment of struggling profitability for main airline clients, and 2) the emergence of a third ground handler in Changi Airport, which could stiffen competition and further erode pricing power. At 13.7x CY12 P/E, SATS is trading slightly above its average forward P/E. A slowing aviation industry and margin pressure could spark a de-rating of its share price. We resume coverage with new forecasts, an unchanged UNDERPERFORM rating and S$2.60 target price, based on 13.1x CY12 P/E, its historical mean since 2004.

• Knock-on effects of a fragile aviation industry. With 59% of revenue derived from the aviation industry, SATS’s profitability is tied to the airline industry’s performance. We have an Underweight rating on this sector as our regional transport analyst anticipates margin pressure from falling utilisation and high fuel costs. Belt-tightening among airlines could have negative knock-on effects on service providers such as SATS, which may end up being squeezed between cost-conscious customers and high food costs.

Margins threat from inflation, challenging aviation sector

• Turbulence ahead. We expect SATS to be swept into some turbulence ahead with headwinds arising from 1) margin squeeze from food inflation and inability to pass through costs in an environment of struggling profitability for main airline clients, and 2) the emergence of a third ground handler in Changi Airport, which could stiffen competition and further erode pricing power. At 13.7x CY12 P/E, SATS is trading slightly above its average forward P/E. A slowing aviation industry and margin pressure could spark a de-rating of its share price. We resume coverage with new forecasts, an unchanged UNDERPERFORM rating and S$2.60 target price, based on 13.1x CY12 P/E, its historical mean since 2004.

• Knock-on effects of a fragile aviation industry. With 59% of revenue derived from the aviation industry, SATS’s profitability is tied to the airline industry’s performance. We have an Underweight rating on this sector as our regional transport analyst anticipates margin pressure from falling utilisation and high fuel costs. Belt-tightening among airlines could have negative knock-on effects on service providers such as SATS, which may end up being squeezed between cost-conscious customers and high food costs.

New competition unlikely to affect SATS

Third ground handling license at Changi Airport awarded. Changi Airport Group (CAG) recently announced that it awarded a third ground handling license (for 10 years) at Singapore Changi Airport to US-based Aircraft Service International Group (ASIG). ASIG will now compete with SATS Ltd and Changi International Airport Services (CIAS) for airline customers in both full service and low-cost carrier segments to provide quality and cost competition for services that include passenger and cargo handling servicing, and ramp handling. In operation since 1947, ASIG has a wide portfolio of airline customers both in the US and Europe that include Vigin Atlantic, JetBlue and Ryanair. It also currently has refueling operations at Suvarnabhumi Airport in Bangkok. The third license comes two years following Swissport International’s withdrawal of operations in Apr 2009 after sustaining losses in excess of US$50m over its four years of operations.

Price competition expected going forward. Based on precedence, we expect the two existing players to pose stiff competition to ASIG. In a press release issued by the Civil Aviation Authority of Singapore (CAAS) back in 2009 when Swissport withdraw its operations, it noted that ground handling rates fell by an average of 15% during the time Swissport was in operations. In a Business Times article on 31 Mar 2008, Swissport blamed “massive undercutting” as one of the key challenges it faced, although the allegations were refuted by its rivals. The re-emergence of a new handler will likely reignite and re-energize competition, and will provide airlines with more options as well as increase their leverage in price negotiations.

SATS to maintain dominance but will face some price pressures. As the dominant player, SATS controls about 80% of the business in Changi. While we anticipate some potential customer losses and potential reduction in ground handling rates, we believe that its regional size advantage and operational experience will not only allow it to survive any price competitions but also to dictate the extent of any potential price reductions. As such, we expect similar reduction of ground handling rates of about 15% going forward once ASIG commences operations, especially given the somewhat stagnant global economic recovery where passenger traffic maybe affected in the near- to medium-term. Besides size advantage, SATS also provides a wide range of unique and integrated services that differentiates itself from its competition and may promote customer loyalty. This market leadership should continue to favour SATS in the face of new competition. We fine-tuned our fair value estimate to S$3.02 (S$3.06 previously) to incorporate anticipated price competition and maintain our BUY rating.

New competition unlikely to affect SATS

Third ground handling license at Changi Airport awarded. Changi Airport Group (CAG) recently announced that it awarded a third ground handling license (for 10 years) at Singapore Changi Airport to US-based Aircraft Service International Group (ASIG). ASIG will now compete with SATS Ltd and Changi International Airport Services (CIAS) for airline customers in both full service and low-cost carrier segments to provide quality and cost competition for services that include passenger and cargo handling servicing, and ramp handling. In operation since 1947, ASIG has a wide portfolio of airline customers both in the US and Europe that include Vigin Atlantic, JetBlue and Ryanair. It also currently has refueling operations at Suvarnabhumi Airport in Bangkok. The third license comes two years following Swissport International’s withdrawal of operations in Apr 2009 after sustaining losses in excess of US$50m over its four years of operations.

Price competition expected going forward. Based on precedence, we expect the two existing players to pose stiff competition to ASIG. In a press release issued by the Civil Aviation Authority of Singapore (CAAS) back in 2009 when Swissport withdraw its operations, it noted that ground handling rates fell by an average of 15% during the time Swissport was in operations. In a Business Times article on 31 Mar 2008, Swissport blamed “massive undercutting” as one of the key challenges it faced, although the allegations were refuted by its rivals. The re-emergence of a new handler will likely reignite and re-energize competition, and will provide airlines with more options as well as increase their leverage in price negotiations.

SATS to maintain dominance but will face some price pressures. As the dominant player, SATS controls about 80% of the business in Changi. While we anticipate some potential customer losses and potential reduction in ground handling rates, we believe that its regional size advantage and operational experience will not only allow it to survive any price competitions but also to dictate the extent of any potential price reductions. As such, we expect similar reduction of ground handling rates of about 15% going forward once ASIG commences operations, especially given the somewhat stagnant global economic recovery where passenger traffic maybe affected in the near- to medium-term. Besides size advantage, SATS also provides a wide range of unique and integrated services that differentiates itself from its competition and may promote customer loyalty. This market leadership should continue to favour SATS in the face of new competition. We fine-tuned our fair value estimate to S$3.02 (S$3.06 previously) to incorporate anticipated price competition and maintain our BUY rating.