OCBC Research on 23 Dec 2011
Passenger, freight and aircraft movements at Singapore’s Changi Airport YTD rose 11.0%, 2.2% and 14.1% respectively, and SATS Ltd Group (SATS) has benefited from the higher volumes. But falling global air freight volumes, usually a leading indicator of air travel, and declining business confidence have clouded the outlook for SATS. During the year, SATS sold its wholly-owned U.K. subsidiary Daniels Group (Daniels) and its Japanese subsidiary TFK turned in an operating profit of S$1.8m in 2QFY12, from the operating loss of S$6.5m in 1QFY12. TFK was boosted by higher volumes from its main customer Japan Airlines, after a major earthquake hit Japan in Mar 2011. We maintain our fair value estimate of S$2.43 per share but upgrade SATS to a BUY based on valuation grounds, after it has been sold down along with the aviation sector in recent weeks.
Strong volumes out of Changi but uncertainty lies ahead. Passenger, freight and aircraft movements at Singapore’s Changi Airport YTD rose 11.0%, 2.2% and 14.1% respectively, and SATS Ltd Group (SATS) has benefited from the higher volumes. While the operational numbers are still strong, falling global air freight volumes, usually a leading indicator of air travel, and declining business confidence have clouded the outlook for the aviation sector and SATS. In addition, SATS’ management warned that inflationary pressures are expected to last at least a few more quarters.
SATS sold Daniels for GBP159m. SATS announced in Oct 2011 that it has agreed to sell its wholly-owned U.K. subsidiary Daniels Group (Daniels) to The Hain Celestial Group, Inc. By selling Daniels, SATS is able to focus on its gateway services and food solutions businesses. And Daniels, which deals more on the production and distribution of food products, is different from its catering-focused food solutions business in Singapore. The total cash consideration for the sale was divided into three tranches of GBP149m, GBP2m and GBP13m. SATS estimated the total sale consideration to be GBP159m (or S$321.1m).
Turnaround at TFK and other positives. Japan Airlines, the main customer of SATS’ Japanese subsidiary TFK, has seen demand and load factor recovering in the aftermath of the earthquake that hit Japan in Mar 2011. Boosted by higher volumes, TFK turned in an operating profit of S$1.8m in 2QFY12, from the operating loss of S$6.5m in 1QFY12. In addition, there are other recent positives for SATS such as (1) its Hong Kong subsidiary SATS HK won a key new business from Hong Kong Airlines, and (2) SATS partnered with Creuers del Port de Barcelona S.A. to win a 10-year lease to manage and operate Singapore’s new International Cruise Terminal.
Maintain fair value S$2.43 and upgrade to BUY. Since we have previously 1) adjusted SATS’ PATMI estimates to account for the impact of the Daniels sale and the strong recovery of subsidiary TFK, as well as 2) factored in the uncertain outlook for the aviation sector, we opt to leave our estimates unchanged for now. Hence, we also maintain our fair value estimate of S$2.43 per share. However, we upgrade SATS to a BUY based on valuation grounds, after it has been sold down along with the aviation sector in recent weeks.
SATS sold Daniels for GBP159m. SATS announced in Oct 2011 that it has agreed to sell its wholly-owned U.K. subsidiary Daniels Group (Daniels) to The Hain Celestial Group, Inc. By selling Daniels, SATS is able to focus on its gateway services and food solutions businesses. And Daniels, which deals more on the production and distribution of food products, is different from its catering-focused food solutions business in Singapore. The total cash consideration for the sale was divided into three tranches of GBP149m, GBP2m and GBP13m. SATS estimated the total sale consideration to be GBP159m (or S$321.1m).
Turnaround at TFK and other positives. Japan Airlines, the main customer of SATS’ Japanese subsidiary TFK, has seen demand and load factor recovering in the aftermath of the earthquake that hit Japan in Mar 2011. Boosted by higher volumes, TFK turned in an operating profit of S$1.8m in 2QFY12, from the operating loss of S$6.5m in 1QFY12. In addition, there are other recent positives for SATS such as (1) its Hong Kong subsidiary SATS HK won a key new business from Hong Kong Airlines, and (2) SATS partnered with Creuers del Port de Barcelona S.A. to win a 10-year lease to manage and operate Singapore’s new International Cruise Terminal.
Maintain fair value S$2.43 and upgrade to BUY. Since we have previously 1) adjusted SATS’ PATMI estimates to account for the impact of the Daniels sale and the strong recovery of subsidiary TFK, as well as 2) factored in the uncertain outlook for the aviation sector, we opt to leave our estimates unchanged for now. Hence, we also maintain our fair value estimate of S$2.43 per share. However, we upgrade SATS to a BUY based on valuation grounds, after it has been sold down along with the aviation sector in recent weeks.
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