TFK at inflection point

• TFK’s contribution to SATS has been lacklustre since it was acquired in 2010, hampered by the 2011 Tohoku earthquake, rising Sino-Japanese tensions since 2012 and falling JPY.
  
• But positive developments are afoot: 1) rise in China visitation numbers to Japan, 2) steady growth in JAL’s international traffic, and 3) expanding customer base.
  
• Longer-term outlook is bright as well. Reiterate BUY on SATS with DCF-based TP of SGD3.47.
  

Lacklustre contribution since acquisition

We believe the market has been overly pessimistic about TFK Corporation’s near-term weakness and ignoring the upside potential for SATS. Granted, the Japan-based inflight catering unit has not been a significant earnings contributor since SATS acquired it in Dec 2010 (FY3/13: 18% of revenue and 6% of EBIT). But its poor performance could be traced to weak meal volumes as a result of lacklustre air traffic growth in Japan following the Tohoku earthquake in Mar 2011 and the rise in Sino-Japanese political tensions since 2012. The sharp drop in the JPY, which dented TFK’s SGD-translated contributions to the group, compounded matters.

But at an inflection point now

The dismal performance notwithstanding, we believe TFK is now at an inflection point and anticipate improving performance hereon. Our positive view is premised on three emerging trends: 1) rise in China visitation numbers to Japan, 2) steady growth in Japan Airlines’ (JAL) international traffic, and 3) expanding customer base. The longer-term outlook is bright too, with additional international slots at Haneda Airport and Japan’s continued emphasis to promote the country’s tourism industry. A potential regional air services agreement between Japan and ASEAN would give a new fillip to air traffic and hence, meal volumes at TFK. SATS is a play on the structural trend of rising air traffic in the region. Reiterate BUY with DCF-based TP of SGD3.47 (WACC = 7.6%, terminal growth rate = 1.0%).

Raises exposure to Indonesia

• Acquires 42% stake in Indonesia’s leading aviation service provider CAS.
  
• Positive move as it raises exposure to fast-growing Indonesia.
  
• Purchase adds 3% to our FY3/15E-16E EPS. Maintain BUY.
  

Acquires 42% stake in PT CAS

SATS announced yesterday the acquisition of a 41.65% stake in PT Cardig Aero Services TBK (CAS) for IDR1,108b (approximately SGD118.3m). CAS is a food solutions and gateway services provider in Indonesia that is listed on the Indonesia Stock Exchange. It derives 73% of its sales from SATS’ 49.8%-owned associate PT Jasa Angkasa Semesta(JAS), which offers ground & cargo services across 11 airports in Indonesia. According to SATS, CAS is the leading player in the Indonesian aviation market with major international airlines, including Singapore Airlines, as its customers. Through its relationship with JAS, SATS has over 10 years of working relations with the CAS management. This acquisition will not trigger a General Offer for the rest of CAS’s listed shares and SATS will continue to equity account for both CAS and JAS post acquisition.

Positive on larger exposure to fast-growing Indonesia

Many airlines have been increasing their capacity between Singapore and Indonesia ever since the two countries inked a bilateral air service agreement last year. With its international clientele, we expect CAS to benefit from the traffic growth between the two countries. While the acquisition price implies a significant 50% premium to CAS’s market price, we argue that an estimated valuation multiple of 21.5x CY14E P/E is reasonable, given the positive growth outlook for the business. Furthermore, SATS can comfortably fund this acquisition with its war chest of SGD355m (Dec 2013). We estimate that this acquisition will add 3% to our FY3/15E-16E earnings forecasts and raise our estimates accordingly. Reiterate BUY with unchanged DCF-based TP of SGD3.47 (WACC = 7.6%, tg= 1.0%).

Raises exposure to Indonesia

• Acquires 42% stake in Indonesia’s leading aviation service provider CAS.
  
• Positive move as it raises exposure to fast-growing Indonesia.
  
• Purchase adds 3% to our FY3/15E-16E EPS. Maintain BUY.
  

Acquires 42% stake in PT CAS

SATS announced yesterday the acquisition of a 41.65% stake in PT Cardig Aero Services TBK (CAS) for IDR1,108b (approximately SGD118.3m). CAS is a food solutions and gateway services provider in Indonesia that is listed on the Indonesia Stock Exchange. It derives 73% of its sales from SATS’ 49.8%-owned associate PT Jasa Angkasa Semesta(JAS), which offers ground & cargo services across 11 airports in Indonesia. According to SATS, CAS is the leading player in the Indonesian aviation market with major international airlines, including Singapore Airlines, as its customers. Through its relationship with JAS, SATS has over 10 years of working relations with the CAS management. This acquisition will not trigger a General Offer for the rest of CAS’s listed shares and SATS will continue to equity account for both CAS and JAS post acquisition.

Positive on larger exposure to fast-growing Indonesia

Many airlines have been increasing their capacity between Singapore and Indonesia ever since the two countries inked a bilateral air service agreement last year. With its international clientele, we expect CAS to benefit from the traffic growth between the two countries. While the acquisition price implies a significant 50% premium to CAS’s market price, we argue that an estimated valuation multiple of 21.5x CY14E P/E is reasonable, given the positive growth outlook for the business. Furthermore, SATS can comfortably fund this acquisition with its war chest of SGD355m (Dec 2013). We estimate that this acquisition will add 3% to our FY3/15E-16E earnings forecasts and raise our estimates accordingly. Reiterate BUY with unchanged DCF-based TP of SGD3.47 (WACC = 7.6%, tg= 1.0%).

Grounded by weak Yen and high staff costs

• 3Q14 results below expectations; net profit dropped by 8.7% to S$42.9m
  
• Weaker contribution from Food Solutions arising from weaker JPY, higher staff costs
  
• Trim forecasts by 9%/2%
  
• Maintain HOLD, TP revised to S$3.25
  

3Q14 results underperform on weaker JPY, higher staff costs. 3Q14 net profit dropped by 8.7% y-o-y to S$42.9m, which was below our expectations. The Group’s revenue slipped by 1.1% to S$465.5m, largely on weaker contribution from its Food Solutions’ segment (-3.9%), mitigated partially by higher contribution from Gateway Services (+4.3%). Food Solutions’ revenue was impacted by JPY depreciation, as well as fewer unit meals served (-5.7%) in 3Q14.

EBIT margins weakened by 0.9ppt to 9%. Operating expenses dipped by a slower pace vis-à-vis topline, largely on the back of higher staff costs. The Group continued to be impacted by higher worker levies. As a result, EBIT margins dipped by 0.9ppt to 9% (3Q13: 9.9%).

Trim forecasts by 9%/2%. We cut our net profit forecasts by 9%/ 2% for FY14F/15F, on the back of a slower topline growth assumption due to a weaker JPY. Our FY15F downward revision is mitigated by the inclusion of contribution from its proposed Singapore Cruise Centre acquisition, which is currently being reviewed by the Competition Commission of Singapore. Management remains hopeful for an outcome by May 2014.

Maintain HOLD, TP at S$3.25. Our TP is adjusted down to S$3.25, due to lower earnings forecasts but mitigated partially, as we roll over our valuation base to FY15F. SATS trades at c.15.9x FY15F PE, which is +0.5 std deviation above its historical mean, and largely in line with regional peers. We believe downside to its share price should be muted, with its strong cash generation and relatively attractive dividend yield of c.5%. Maintain HOLD.

Grounded by weak Yen and high staff costs

• 3Q14 results below expectations; net profit dropped by 8.7% to S$42.9m
  
• Weaker contribution from Food Solutions arising from weaker JPY, higher staff costs
  
• Trim forecasts by 9%/2%
  
• Maintain HOLD, TP revised to S$3.25
  

3Q14 results underperform on weaker JPY, higher staff costs. 3Q14 net profit dropped by 8.7% y-o-y to S$42.9m, which was below our expectations. The Group’s revenue slipped by 1.1% to S$465.5m, largely on weaker contribution from its Food Solutions’ segment (-3.9%), mitigated partially by higher contribution from Gateway Services (+4.3%). Food Solutions’ revenue was impacted by JPY depreciation, as well as fewer unit meals served (-5.7%) in 3Q14.

EBIT margins weakened by 0.9ppt to 9%. Operating expenses dipped by a slower pace vis-à-vis topline, largely on the back of higher staff costs. The Group continued to be impacted by higher worker levies. As a result, EBIT margins dipped by 0.9ppt to 9% (3Q13: 9.9%).

Trim forecasts by 9%/2%. We cut our net profit forecasts by 9%/ 2% for FY14F/15F, on the back of a slower topline growth assumption due to a weaker JPY. Our FY15F downward revision is mitigated by the inclusion of contribution from its proposed Singapore Cruise Centre acquisition, which is currently being reviewed by the Competition Commission of Singapore. Management remains hopeful for an outcome by May 2014.

Maintain HOLD, TP at S$3.25. Our TP is adjusted down to S$3.25, due to lower earnings forecasts but mitigated partially, as we roll over our valuation base to FY15F. SATS trades at c.15.9x FY15F PE, which is +0.5 std deviation above its historical mean, and largely in line with regional peers. We believe downside to its share price should be muted, with its strong cash generation and relatively attractive dividend yield of c.5%. Maintain HOLD.