SATS (SATS SP) - UOB Kay Hian 2017-09-13: Risk/Reward Tilted Towards The Upside, Expecting 16% Total Return Over The Next 12 Months

SATS (SATS SP) - UOB Kay Hian 2017-09-13: Risk/Reward Tilted Towards The Upside, Expecting 16% Total Return Over The Next 12 Months SATS LTD. S58.SI

SATS (SATS SP) - Risk/Reward Tilted Towards The Upside, Expecting 16% Total Return Over The Next 12 Months

  • Risk/reward for SATS is tilted towards the upside over the next two quarters. 
  • We expect SATS to secure inflight catering and ramp handling contracts from Qantas and very likely from Norwegian Air too. We expect 2QFY17 earnings to rise qoq from the inclusion of Jetstar Asia’s catering contract and the ground handling contract for AirAsia. 
  • Together with dividends, we expect SATS to generate a total return of 16% over the next 12 months. 
  • Our target price of S$5.40 implies an FY18F PE of 23.5x and 18x ex-cash. Maintain BUY.



WHAT’S NEW


Qantas’ return to Singapore will benefit SATS. 

  • In late-August, Qantas announced that from Mar 18, it will shift its transit hub from Dubai to Singapore for its kangaroo routes. Thus, its Sydney-London service will transit out of Singapore. We believe there is a strong chance that Qantas will choose SATS for its inflight catering, ramp handling and cargo handling services, instead of Emirates-owned Dnata. 
  • Aside from the fact that SATS is not owned by a competing airline, the company already provides ground handling services to its sister carrier, Jetstar Asia. (From 1 August, SATS provided catering services as well). Qantas will reportedly add 3,288 one-way seats from Singapore to UK and another 3,806 one-way seats from Melbourne to Singapore. 
  • Given that both are long haul routes, and with the Singapore to London leg being a key business route, SATs will benefit from proportionately more unit meals on the two routes. Both routes will feature wide-bodied aircraft which would also lead to greater value-added ground handling revenue. 
  • On balance, we believe that Qantas could boost SATs local inflight catering and ground handling revenue by 3% and boost net profit by a similar proportion.

Commencement of Norwegian Airline flights could also benefit SATS. 

  • Low-cost carrier Norwegian Air, will launch 4x weekly flights to Gatwick, UK on 28 Sep 18. This translates to 1,720 additional weekly seats. 
  • Here again, we believe that SATS is likely to emerge as the preferred inflight caterer (yes, Norwegian Air offers meals) and ground services provider, due to the fact that it is not aligned with a competing carrier.

Phenomenal air cargo traffic growth continues. 

  • In July, cargo throughput in tonnage at Changi, rose 11.2% yoy and was higher than the preceding quarter’s +7.5% average. This holds scope for a good 2QFY18 for SATS, as the carrier is highly leveraged to cargo traffic growth. 
  • Global air cargo volumes continued to rise by double digits over the past three months and this should boost gateway services revenue for associates in Indonesia, Hong Kong, Taipei, Beijing and Tianjin. Yields have also shown notable improvements and this should support pricing.


STOCK IMPACT


BUY SATS, positive earnings catalyst from cargo operations and new contract. 

  • We believe that the street has not factored in the positive newsflow and the impact to earnings for FY19. We estimate that if SATS secures the contract from Qantas, it could raise FY19’s earnings by about 3%. 
  • In addition, we do not expect any negative surprises for earnings over the next two quarters as earnings are likely to receive a further boost from the commencement of ground handling services to AirAsia in Jul 17 and catering services to Jetstar Asia in Aug 17. 
  • There is also the possibility that margins could improve in 2HFY18 and FY19, as more passengers use Changi’s FAST check in services, thus reducing the need for related labour.

We expect SATS to generate 16% total holding period return in the next 12 months. 

  • We estimate that dividend payout could approximate 19 S cents (83% payout) for FY18 and together with our target price of S$5.40, the stock could offer investors 16% upside.


EARNINGS REVISION/RISK

  • We have not changed our earnings estimates as yet. Just one month ago, we raised our FY18/19 net profit forecasts by 4%/7%.


VALUATION/RECOMMENDATION

  • Maintain BUY with a target price of S$5.40 (we continue to value the company on an EV/Invested Capital basis with a WACC of 6.1% and growth rate of 3.1%). 
  • At our fair value, the stock will trade at 23.5x PE and 18x ex-cash, while offering a dividend yield of 3.5%

SHARE PRICE CATALYST

  • Announcement of contract awarded to SATS by Qantas.




K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 5.400 Same 5.400



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