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SATS - Maybank Kim Eng 2016-08-23: Expanding into Saudi Arabia

SATS (SATS SP) - Maybank Kim Eng 2016-08-23: Expanding into Saudi Arabia SATS LTD S58.SI

SATS (SATS SP) - Expanding into Saudi Arabia


Positive development; Maintain SELL on valuations 

  • We view its expansion into Saudi Arabia’s cargo market positively. It gives the company another avenue of growth and we see potential for it to provide more services in the long run. However, we believe this greenfield project is a riskier venture than its earlier expansions. 
  • We keep our forecasts intact as earnings contribution will only kick in from 1Q19. 
  • Despite the company’s good execution, we reiterate our view that valuations are stretched at 22x FY17 EPS. There have been no significant improvements to its fundamentals that could justify the strong share price rally in recent months. 
  • Maintain SELL. (TP S$3.76)


Expanding into cargo market in Saudi Arabia

  • SATS announced that it has won a tender to build and operate a cargo terminal in Dammam, Saudi Arabia. The new facility is expected to cost SGD40m and has the capacity to handle 150,000 tonnes of cargo annually. The concession is for 22.5 years.


Slightly higher risk than typical venture 

  • As a greenfield project, we believe this is a riskier venture than its earlier expansions. SATS’s past ventures were mostly joint ventures or acquisitions into brownfield projects. 
  • Furthermore, competition could be intense as the cargo handling arm of Saudi Arabian Airlines, the national carrier, is currently the sole player in the market. 
  • Nonetheless, management is confident that it can differentiate itself with better service offering and aims to win over more customers.


Potential for more 

  • Overall, we view this development positively. 
  • This expansion into a new market adds another dimension of growth for the company and we see potential for more. 
  • In the longer term, we believe SATS could pursue other passenger handling and inflight catering contracts in the country to drive scale. 
  • Nonetheless, earnings contributions will not be significant as the new facility will only be completed in 2019. Even on a steady state, the maximum capacity of this facility is just 9% of the 1.6m tonnes of cargo that it handles in Singapore a year.


Swing Factors


Upside

  • Higher-than-expected growth in air traffic.
  • Inorganic growth from acquisitions.
  • Higher dividend payout. Payout ratio had been capped at 80% despite large cash hoard. Upside to payout is possible to drive efficient use of capital.

Downside

  • Stagnant or contraction in air traffic.
  • Poor execution from new acquisitions. For example, earnings drag from its recently acquired 34% stake in Brahim’s inflight catering business.
  • Market expects margins and EPS to rise as the company drives scale across the group. Inability to contain cost increase could lead to disappointment.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-23
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 3.760 Same 3.760


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