SATS Ltd - OCBC Investment 2016-09-28: Cautious on rich valuations

SATS Ltd - OCBC Investment 2016-09-28: Cautious on rich valuations SATS LTD S58.SI

SATS Ltd - Cautious on rich valuations

  • Changi Airport’s growth slowed in Aug.
  • Near-term positives priced-in.
  • Maintain HOLD.

Changi Airport’s Aug passenger traffic fell 0.6% YoY 

  • Singapore Changi Airport yesterday posted its operating statistics for Aug 16. For the period Jan-Aug 16, Changi Airport recorded steady growth in passenger throughput (6.5% YoY), aircraft movements (4.3% YoY) and air freight movements (5.2% YoY). That said, we think Aug 16 statistics showed indications that traffic growth at Changi Airport may be slowing down.
  • For Aug 16, passenger throughput declined 0.6% YoY (compared to 5.9% YoY growth in Jul 16), aircraft movements rose 2.2% (compared to 4.7% growth in Jul 16) and air freight movements rose 7.6% (compared to 9.4% growth in Jul 16). 
  • As a key service gateway services and food solutions provider at Changi Airport (~80% market share), SATS Ltd’s revenue from Singapore is correlated to traffic handled at the airport. 
  • Singapore Tourism Board’s data also showed that YoY growth in visitor arrivals from North Asia to Singapore has been trending downwards every month since Apr 16.

Focused on driving productivity improvements 

  • In our view, SATS’ on-going plans to diversify out of Singapore and away from reliance on the aviation industry will take time to bear fruit, and unlikely to see material results in the near-term. 
  • However, we note that its focus to continuously drive productivity improvements is already bearing fruits and we expect such improvements to continue, albeit at a slower pace. 
  • In anticipation of increased demand with terminal 4 and 5 targeted to open in 2017 and mid-2020s, respectively, SATS is also making an S$18m investment in new production line that will increase capacity by 15% to 115,000 meals a day by mid-CY17 and will enable mechanisation of up to 50% of certain kitchen operations.

Look for buying opportunities below S$4.40 

  • All said, we think the near-term positives (e.g. continuous productivity improvement efforts and strong but tapering growth at Changi Airport) are priced-in with SATS trading at a rich valuations of 22x FY17F P/E. 
  • Therefore, we maintain HOLD with an unchanged FV of S$4.70
  • However, we are still positive on SATS’ long-term growth and would look for buying opportunities below S$4.40

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-09-28
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 4.700 Same 4.700