Tuesday 2 July 2013

SATS

OCBC on 1 Jul 2013

SATS announced that it will sell its 40% equity interest in its Adel Abuljadayel Flight Catering Company joint venture for a cash consideration of US$18.4m (~S$23.4m), which is slightly below the book value of the asset as of 31 Mar (S$24.1m). Despite the short two-year tenure of the JV, the exit does not signal a change in management intent regarding the region. Management still intends to re-enter the Middle East, and will continue to pursue other attractive investment opportunities. In the interim, the outlook for SATS remains positive and we believe the counter’s earnings stability and healthy dividends will allow it to stay resilient amidst recent market volatility. Maintain HOLD with an unchanged fair value of S$3.15

Disposal of Adel Abuljadayel JV
SATS announced that it will sell its 40% equity interest in its Adel Abuljadayel Flight Catering Company joint venture for a cash consideration of US$18.4m (~S$23.4m), which is slightly below the book value of the asset as of 31 Mar (S$24.1m). The stake will be purchased by the JV’s existing shareholder, Adel Abdulmajed S Abuljadayel, and the proposed sale will be subject to the fulfilment of certain conditions and the procurement of necessary regulatory approvals by the Saudi Arabian General Investment Authority. 

Short-lived JV but view on Mid-East unchanged
Despite the short tenure of the JV – the 40% equity interest was only purchased back in Apr 2011 – the exit does not signal a change in management intent regarding the region. Management still intends to establish a foothold in the Middle East, and will continue to pursue other attractive investment opportunities. That said, the inherent difficulties in penetrating the region and sourcing for a suitable partner will mean that future opportunities will likely take the form of JVs. 

Minimal impact on financials
The JV does not contribute significantly to SATS’s west Asia operations as the segment is largely dominated by its Indian sub-continent JVs so the impact to its financials will be minimal. 

Outlook remains positive; maintain HOLD
With its earnings stability, positive prospects (Changi Airport passenger traffic grew 4.7% YoY for May) and healthy dividends, it is no surprise to see SATS’s share price remain fairly resilient even in the face of recent market volatility. Although valuations are still expensive in our view as many of the positives have already been priced in, we believe the counter will continue to hold up in the coming weeks ahead of its 1Q14 results. Maintain HOLD with an unchanged fair value of S$3.15.

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