• Unexciting operating statistics at Changi Airport
• Fundamentally sound operations
• Fairly valued; maintain HOLD

Expects flat to moderate growth at Changi Airport

According to a recent report by Airports Council International (ACI), the number of passengers that used airports in the Asia-Pacific region in 2014 grew 7.1%, but Changi Airport only registered a weak 0.7% growth as a result of overcapacity in Southeast Asia region.

Coming into CY15, Changi Airport’s operating statistics continued to show sluggish performance for the Jan-Jul period, as the total number of passenger, air freight and aircraft movements came in flat YoY at 0.3%, -0.5% and -0.3%, respectively. That said, Singapore Tourism Board stated last Friday that it continues to expect 0.0% to 3.0% growth in visitor arrivals for CY15.

SATS Ltd’s (SATS) growth outlook is positively correlated to the performance and outlook of Singapore’s Changi Airport because SATS generates ~82% (FY15) of its total revenue locally. Its core business segments include Food Solutions (FS), which provides inflight meals, and Gateway Services (GS), which provides services such as baggage handling, depend on the number of passenger movements, airfreight movements as well as number of aircraft movements at Changi Airport.

Expects steady operational improvements

While we do not expect exciting revenue growth in the near-term, we believe SATS will continue its operational improvements driven by management efforts to increase productivity, investing in automation to allow for sustainable reduction in staff costs, which also leads to increase in operating leverage.

Even though overall airfreight industry growth is still relatively muted, SATS has been recording an increase in its market share in cargos which commands higher margins (i.e. cold chain facility). Another area that helps SATS in its top line is the contribution from its Japanese subsidiary, TFK, which is expected to increase with the contract win to support all of Delta’s flight operations in Tokyo.

Fairly valued; maintain HOLD

On these reasons, we believe SATS is fairly valued at the current price levels, and supported by forward dividend yield of 3.9%, maintain HOLD with unchanged FV of S$3.78.

Source: OCBC Research - 22 Sep 2015