SATS Ltd (KimEng)

Event

While there are headwinds from global economic concerns and cost pressures, SATS is still well-positioned to maintain its revenue base and expand on recent acquisitions. At 1.6x P/B, the stock is trading below its mean P/B of 1.8x. We do not see any immediate catalysts for an upward re-rating, but the company’s steady dividend payout should keep investors happy while it waits for more growth opportunities. Maintain HOLD with the target price at $2.43.

Our View

For its aviation-related business, Singapore visitor arrivals continue to hover around the 1.1m visitors per month. While a significant part of the growth is being driven by low cost carriers, which typically require less of SATS’ service offerings, the company still has a 75% market share for gateway services and 86% for food solutions.

With regard to higher operating costs, SATS still has good leeway to pass on higher food costs to its aviation-related customers. Its clientele is mainly full-service carriers, which are more dependent on SATS for its in-flight solutions as opposed to the low cost carriers. For non-aviation customers, the passing on of higher input prices is also justifiable. In the meantime, SATS is striving to further improve its own efficiency.

The results for the bid to operate the $500m Singapore International Cruise Centre (ICT) should be known by next month. There are three parties vying for the deal, with the incumbents Singapore Cruise Centre and SATS (in partnership with a Spanish operator) recently joined by Jurong Port. As it is, SATS feels reasonably confident of securing the bid and should be able to hit the ground running as it currently operates a Cruise-Fly handling service with Royal Caribbean Cruises.

Action & Recommendation

We expect earnings to hold steady in FY Mar12, with a 15% growth in FY Mar13 to be driven by a recovery at TFK in Japan. We maintain our HOLD call. SATS’ dividend yield of 5-6% is supported by strong free cash flow.