TFK’s contribution to SATS has been lacklustre since it was acquired in 2010, hampered by the 2011 Tohoku earthquake, rising Sino-Japanese tensions since 2012 and falling JPY.

But positive developments are afoot: 1) rise in China visitation numbers to Japan, 2) steady growth in JAL’s international traffic, and 3) expanding customer base.

Longer-term outlook is bright as well. Reiterate BUY on SATS with DCF-based TP of SGD3.47.

Lacklustre contribution since acquisition

We believe the market has been overly pessimistic about TFK Corporation’s near-term weakness and ignoring the upside potential for SATS. Granted, the Japan-based inflight catering unit has not been a significant earnings contributor since SATS acquired it in Dec 2010 (FY3/13: 18% of revenue and 6% of EBIT). But its poor performance could be traced to weak meal volumes as a result of lacklustre air traffic growth in Japan following the Tohoku earthquake in Mar 2011 and the rise in Sino-Japanese political tensions since 2012. The sharp drop in the JPY, which dented TFK’s SGD-translated contributions to the group, compounded matters.

But at an inflection point now

The dismal performance notwithstanding, we believe TFK is now at an inflection point and anticipate improving performance hereon. Our positive view is premised on three emerging trends: 1) rise in China visitation numbers to Japan, 2) steady growth in Japan Airlines’ (JAL) international traffic, and 3) expanding customer base. The longer-term outlook is bright too, with additional international slots at Haneda Airport and Japan’s continued emphasis to promote the country’s tourism industry. A potential regional air services agreement between Japan and ASEAN would give a new fillip to air traffic and hence, meal volumes at TFK. SATS is a play on the structural trend of rising air traffic in the region. Reiterate BUY with DCF-based TP of SGD3.47 (WACC = 7.6%, terminal growth rate = 1.0%).  

Source: Maybank Kim Eng Research - 7 Mar 2014