• Multi-year contract win worth S$325m
• Revision to forecasts
• Slightly higher FV; maintain HOLD

Contract win likely not material on group level

SATS Ltd (SATS) recently announced that its 59.4%-owned Japanese subsidiary, TFK Corporation (TFK), won a multi-year inflight catering contract from Delta Air Lines (Delta), estimated to be worth ~JPY30b or ~S$325m, assuming that the contract gets renewed upon expiry of its initial term. Post transition to TFK, Delta will close down its own inflight kitchen, when catering services to Delta at two international airports in Tokyo commence by Oct 15. While SATS is tight-lipped over contract details, we assume the initial term is five years with an option to renew an additional three years, deriving ~S$41m in annual contribution to SATS revenue. In our view, margins will continue to be pressurized on intense competition, but the increase in scale should result in improved operating efficiency at TFK, though contribution to bottom-line at group level is likely not material.

Tourism outlook in Singapore to remain modest

SATS’ core businesses in food solutions and gateway services are directly affected by tourism growth in Singapore, which is the main driver for air traffic growth. For the first four months of 2015, arrivals by air declined by 5.2% YoY. However, we expect these statistics to improve as Singapore: 1) hosted the 28th SEA games over the month of Jun 15, and 2) is engaging in aggressive marketing for SG50 celebrations, which may drive up visitor arrivals. STB expects tourism numbers to grow modestly between 0% and 3% for 2015.

However, according to a recent report by CAPA, the number of visitors coming to Southeast Asia ex-Thailand shrunk between 2013 and 2014, as well as between 1Q14 and 1Q15, as Chinese tourism preferences are shifting from Southeast Asia to Northeast Asia. Chinese visitors made up a substantial ~16% of Singapore’s total visitor arrivals in 2014.

Revision to our conservative forecasts; maintain HOLD

Incorporating TFK’s contract and revising our initially conservative forecasts, we bump up FY16F/17F PATMI slightly by 3.7%/3.0%. We remain cautious as we opt to wait for stronger indications of air traffic growth. Consequently, our FV increases from S$3.11 to S$3.22 (still based on 16.5x FY16F EPS). Maintain HOLD on SATS.

Source: OCBC Research - 26 Jun 2015