SATS Ltd - OCBC Investment 2018-01-16: Wait For Better Entry Levels

SATS Ltd - OCBC Investment 2018-01-16: Wait For Better Entry Levels SATS LTD. S58.SI

SATS Ltd - Wait For Better Entry Levels

  • Traffic growth at Changi Airport still strong.
  • Unclear over any potential pricing pressure.
  • Longer-term outlook still positive.

Encouraging operating statistics at Changi Airport 

  • Singapore’s Changi Airport posted yet another set of encouraging operating statistics for Nov 17 as passenger throughput grew 8.1% YoY, aircraft movements rose 4.8% and air freight movements surged by 10.7%. For the period from Jan-Nov 17, YoY growth remained strong across all three categories – passenger throughput (+6.3%), aircraft movements (+3.6%) and air freight movements (+8.1%). 
  • As highlighted before, strong traffic growth at Changi Airport is positive for SATS as we estimate SATS to handle close to 80% of the traffic throughput there. In addition, the opening of Terminal 4 on 31 Oct 17 provides room for longer-term traffic growth at Changi Airport, which we believe will benefit SATS as the dominant ground handling provider at Changi Airport. 
  • That said, it remains unclear whether the pressure on yields faced by airlines will be translated to pricing pressure for SATS.

Positive longer-term outlook intact 

  • Over the longer-term, we remain positive over SATS’ outlook driven by its strategy to diversify out of Singapore as well as into non-aviation business segments, through several overseas partnerships. More notably, we remain positive on its partnership with:
    1. AirAsia as it opens up opportunities for SATS in Indonesia, Philippines and Thailand, and
    2. Wilmar to supply quality and safe food in China, enabling it to leverage on Wilmar’s distribution network in China. 
  • In addition, we also like its potential partnership with Turkish Airlines (THY) to provide in-flight catering services to THY and other airlines at Istanbul New Airport.

Higher Fair Value Estimate of S$5.50 but re-engage closer to S$5.05 

  • Consequently, on aforementioned reasons, we raise our FY18F-FY22F EPS by 2%-8%, and increase our Fair Value Estimate to S$5.50. However, SATS’ share price has appreciated ~25.0% (15 Jan 18 close) since we upgraded the stock to BUY on 2 Oct 17. 
  • All considered, while we remain positive over its longer-term outlook, we downgrade SATS to HOLD as we believe investors should position themselves to accumulate closer to S$5.05 and lower.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2018-01-16
OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 5.50 Up 5.050