SATS Ltd - CIMB Research 2018-04-18: The Magic Of Thinking Big

SATS Ltd - CIMB Research 2018-04-18: The Magic Of Thinking Big SATS LTD. S58.SI

SATS Ltd - The Magic Of Thinking Big

  • SATS's share price spike could have been fuelled by news that Temasek is mulling over acquiring stakes in Swissport and Gategroup from Chinese conglomerate HNA.
  • HNA had planned to list Gategroup but canned that last minute on valuation gap; its plan to list Swissport was also deferred.
  • Given Temasek’s c.40% stake in SATS, the market could be hoping for a three-way collaboration, birthing a global giant in airline catering and ground handling services.
  • We think the excitement could be premature for now. In the near term, SATS’s plate could be full, with Turkish Airlines MOA and integrating AirAsia's ground handling.
  • Maintain HOLD and Target Price of S$5.17, based on 20x CY19F P/E (3-year mean).

News of MOA extension did not shake confidence 

  • SATS recently announced extension to its six-month MOA (signed on 17 Oct 2017) with Turkish Airlines. Both parties have executed an addendum to the MOA with further terms in relation to the provision of in-flight catering services to Turkish Airlines and other airlines at the Istanbul New Airport. 
  • It was previously announced that completion of the transaction is subject to the fulfilment of certain conditions precedent, including securing regulatory approvals. SATS earlier planned to announce details with its FY18 results.

Temasek mulling over stakes in Gategroup and Swissport 

  • Newswire reported recently that Temasek is considering buying stakes in HNA-owned Swissport (ground and cargo handling services) and Gategroup (airline catering) to complement its portfolio. It was reported that agreements could be reached by 3Q18.
  • HNA had planned to list Gategroup (raising US$1.9bn) at more than 23x FY17 P/E but that was canned last minute in Mar due to valuation gap. Last week, Swissport also announced the deferment of its IPO plan indefinitely, citing current market conditions.

Giant in the making or independent portfolio? 

  • Assuming Temasek manages to acquire meaningful stakes (and board seats) in both Swissport and Gategroup, we think there could be some form of collaboration in the long term. In the near term, we expect all three groups to run independently as part of Temasek’s portfolio. 
  • For the record, in 2017, Swissport achieved US$3.5bn in revenue, handling more than 4.5m flights (SATS: 171k) and 4.7m tonnes of cargo (SATS: 1.7m). Gategroup’s revenue was US$4.6bn in 2017.

SATS's plate full near term 

  • We think SATS’s focus in the near term is to seal a deal with Turkish Airlines to expand a new kitchen (potentially 50/50 ownership) in Instanbul in phases. This could take up to two years to see meaningful contribution. 
  • In addition, its JV with AirAsia Malaysia which started operating in Nov 17 would likely see some start-up costs in the next one to two quarters.

Maintain HOLD and target price of S$5.17 

  • At 22x CY19F P/E, we think the stock is fairly priced as we expect single-digit earnings growth ahead. 
  • Downside to our earnings forecasts could come from longer-than-expected time to seal a deal with Turkish Airlines and hiccups in new markets. 
  • Upside risk are earnings-accretive M&As and exceptional gains that could lift overall ROE.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-04-18
SGX Stock Analyst Report HOLD Maintain HOLD 5.170 Same 5.170