SATS Ltd - OCBC Investment 2016-08-30: Growing through diversification

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SATS LTD S58.SI

SATS Ltd - Growing through diversification

• Positive long-term outlook.
• Expansion takes time to bear fruits.
• Valuations looking rich.

Entering the Saudi Arabian cargo market 

• SATS Ltd (SATS) recently announced that it has won a tender to build and operate a cargo terminal in Dammam, Saudi Arabia, which is expected to complete by 1Q19. The facility will have a capacity to handle 150,000 tonnes of cargo annually and will also have a dedicated cold chain facility to handle higher value, temperature-sensitive goods such as those for the pharmaceutical and food industries.
• Currently, the sole cargo handler at King Fahd International Airport (KFIA) is the cargo arm of Saudi Arabian Airlines. And SATS will become the second cargo terminal operator at KFIA, with a cargo handling concession that is valid for 22.5 years. 
• In our view, we are positive on the long-term impact with this diversification out of Singapore, especially in a business where SATS already has the expertise (i.e. established player at Changi Airport). 
• Nonetheless, we believe such diversification and ramp up in business take time to bear fruits.

Diversification helps improve long-term outlook 

• All said, going forward, we expect SATS to continue its steady growth on numerous drivers: 
  1. higher airline loads despite weak yields, especially with the opening of Terminal 4 in Singapore within the next 1-2 years, 
  2. productivity drive to improve profitability, evident with the recent S$18m investment in new highly automated kitchen production line at Changi Airport, 
  3. improving performance at its Japanese subsidiary after it won S$325m catering contract in Japan with Delta Airlines, 
  4. expansion into non-aviation food catering in China through JV with Wilmar, and 
  5. its JV with DFASS Singapore to provide inflight and groundbased duty free or paid sales of liquor and merchandises.

Maintain HOLD on higher FV 

• As we update our assumptions, which also take into consideration the low interest rate environment, our cost of equity assumption decreases from 6.9% to 6.4%. 
• Consequently, our FV increases from S$4.20 to S$4.70 (terminal growth: 2%). 
• Maintain HOLD, as we think SATS’ valuations are looking rich at 22x FY17F P/E given the recent rally in its share price.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-08-30

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 4.70 Up 4.200