SATS Ltd - UOB Kay Hian Research 2015-10-07: Positives Priced In, Downgrade To HOLD

SATS Ltd - UOB Kay Hian Research 2015-10-07: Positives Priced In, Downgrade To HOLD SATS LTD S58.SI 

SATS (SATS SP) Positives Priced In, Downgrade To HOLD 

  • SATS has outperformed the FSSTI by a whopping 37% since we upgraded the stock in May. PE valuations are now at historical highs, while dividend yield is at a 2-year low. At current levels, we are mindful of downside risks, particularly from weak cargo throughput at Changi and Hong Kong. 
  • We also note that SATS’ depreciation relative to PPE has been rising steadily, which suggests the need for higher replacement capex and thus potentially lower FCF going forward. 
  • We thus downgrade SATS to HOLD from BUY and lower our target price to S$3.90. Suggested entry level: S3.60. 


• Outperformed the FSSTI by a whopping 37%, since May. 

  • SATS has outperformed the FSSTI by 37% (excluding dividends) since we last upgraded the stock on 15 May. Then, we cited improved pricing power at the gateway services, restructuring at TFK, the S$325m contract from Delta Airlines as primary near-term catalysts. We were also optimistic about SATS. Aside from inclusion into the FSSTI, we believe SATS’ stock price was supported by: a) increased stock buybacks, and b) a shift out of the more vulnerable dividend yield stocks. 

• Cognisant of negative surprises; weak cargo throughput could be one. 

  • Gateway services accounts for 40% of total revenue. Volume of cargo handled, which is a part of gateway services could disappoint in 2QFY16 as Changi Airport’s cargo volume had declined by 4% in July and August. SATS handles 85% of the cargo volume at Changi. Given falling regional exports and PMI, there is a risk that cargo volume for both Singapore and Hong Kong operations (associate Asia Airfreight Terminal) could be weaker than what the market is expecting. Theoretically, this could be offset by an increased number of flights handled at Changi. However, we note that SATS’ share of flights handled at Changi had declined by 7.4ppt in 1QFY16 to 70.3%. 

• Potential for higher capex going forward. 

  • SATS had guided for higher capex over the past 1.5 years. We note that accumulated depreciation as a percentage of property, plant and equipment (PPE) has been steadily rising over the past four years. This underscores the need for incremental replacement capex going forward, particularly for ground services equipment. 


• Dividend yield at 2-year low, while PE multiples are at record high levels. 

  • SATS trades at a dividend yield of 3.9%, which is at a 2-year low, while PE multiples are at record high levels close to 2SD above mean. While ROE has also risen, this has been mainly achieved on cost savings, rather than revenue growth. While we are generally optimistic of management’s ability to deliver growth, SATS is still exposed to the cyclical headwinds, particularly related to cargo handling and flight arrivals. 


  • We have lowered our FY17 net profit by S$5.0m, after assuming slower cargo and unit services growth. 


• Downgrade to HOLD. 

  • We recommend a switch out of SATS into ST Engineering (STE SP/BUY/Target: S$3.50), which is now our preferred pick in aviation support services. STE also offers a dividend yield of 4.9% vs SATS’ estimated 3.9%. 
  • We do not expect SATS to outperform the FSSTI over the next six months as much of the positives have been priced in. There is also the possibility of lower associate income from its Indonesian and Chinese associates due to weaker currencies. 
  • We trim our target price to S$3.90. We had previously valued SATS on a DDM basis and derived a fair value of S$4.00. 


  • Improved operating numbers. 

K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-07
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 3.90 Down 4.00