SATS - Phillip Securities 2019-12-16: Regional Expansion Via Strategic Investments

SATS LTD. (SGX:S58) | SGinvestors.io SATS LTD. (SGX:S58)

SATS - Regional Expansion Via Strategic Investments

  • Central kitchen business in China and India expected to grow at a CAGR of 4% and 6% respectively from 2017 to 2023. The addressable market for the central kitchen is larger than the whole of the aviation food business in Asia.
  • Accretive acquisitions for SATS will increase their presence and accelerate growth in China and India. SATS’ S$1bn investments in 3 years will bring S$43.9mn to its bottom line.
  • TFK likely to experience a surge of growth in volumes due to the Japan Olympics.
  • Cargo is likely to bottom out in the next few quarters. While higher efficiency and cost reduction due to the digital cargo platform will offset the weak cargo volumes.
  • Maintain ACCUMULATE with a target price of $5.36.

SATS - Background

  • SATS LTD (SGX:S58) provides gateway services and food solutions. The Company specializes in airfreight, ramp and baggage handling, passenger services, aviation security services, aircraft cleaning, and cruise centre management. It also provides airline catering, institutional catering, aviation laundry, and food distribution and logistics. SATS has a presence across Asia and the Middle East.
  • See SATS Share Price; SATS Dividend History; SATS Announcements; SATS Latest News.

SATS - 2020 Investment Merits/ Outlook

Opportunity in the new central kitchen business.

  • SATS has diversified into the central kitchen business in China and India. The first central kitchen in Kunshan supports restaurants such as Disneyland, Haidilao, Shangri-la Hotel and Luckin Coffee. The addressable market for central kitchen in China alone (S$19.7bn by 2023) is larger than the whole of aviation food business in Asia (S$12bn by 2023).
  • SATS expects the central kitchen business in China and India to grow at a CAGR of 4% and 6% respectively from 2017 to 2023.

Accretive acquisitions to accelerate growth in the APAC aviation market.

  • SATS acquired 50% of Nanjing Weizhou Airline Food (NWAF), which serves key customers such as China Eastern, China Southern, China Railway and Shenzhen Airline. SATS is also the only independent service provider of inflight catering and ground handling services for Daxing International Airport (DIA), the largest airport in the world, through 2 joint ventures with Capital Airports Holdings.
  • We believe the accretive acquisitions will fit into the channel distribution strategy and expand the presence of SATS in China and India. SATS aims to make further greenfield or brownfield investments of S$1bn over the next 3 years. Based on a FY19e P/E ratio of 22.8, we expect the investments to bring S$43.9mn to SATS’ bottom line over 3 years.

TFK to reap short-term benefits from the Japan Olympics.

  • TFK is gearing up for the Olympics by doubling capacity with a new in-flight kitchen to serve Haneda and Narita Airport. It is likely to benefit in the short-term from the Japan Olympics due to an increase in the number of international flights and passenger volumes.

Cargo likely to bottom in the next few quarters.

  • Weakness in the cargo volumes is likely to persist for the next few quarters due to macro headwinds. Margins for SATS would be depressed as cargo has high operating leverage. However, investments in the digital cargo platform will help to enhance efficiency and reduce costs, which will help to offset lower volumes in the near-term.


  • We maintain ACCUMULATE with a target price of $5.36. We like the stock for its regional expansion opportunities. The strong cash flow generation will help sustain the 3.4% dividend yield. See SATS Target Price; SATS Analyst Reports.

Edmund Xue Phillip Securities Research | https://www.stocksbnb.com/ 2019-12-16