• Encouraging visitor arrivals statistics
• Steady growth outlook
• FY17F dividend yield of 3.9%

SATS a beneficiary of strong tourism trend

For the period between Jan and Apr 16, Singapore Changi Airport recorded strong traffic statistics as passenger throughput jumped 9.7% YoY, while aircraft movements increased 5.3% YoY on the back of encouraging tourism data in Singapore.

According to Singapore Tourism Board, visitor arrivals (all modes of transport) between Jan-Apr 16 registered a solid 14.1% YoY growth, driven mainly by visitors from Australia, China, India, Indonesia and Thailand. As a provider of gateway services (GS) and food solutions (FS) for close to 80% of Changi Airport’s traffic throughput, SATS Ltd (SATS) will be a key beneficiary of such strong growth registered during the period.

More specifically, visitor arrivals by air grew 13.5% YoY through the same period, driven mainly by visitors coming from China (+40.8%), Indonesia (+13.1%) and Thailand (+28.6%). Chinese visitor arrivals have shown tremendous improvement since the incident of MH370, and will be positive for SATS, if this rebound in travel to Southeast Asia persists on.

Loads to increase amid weak yield environment

While passenger yields remain weak for the airline industry, the expected growth in aircraft fleet in the Southeast Asia region as well as the rise in middle class in developing countries that increases air travel demand will continue to drive growth ahead for SATS over medium to longerterm.

At least back home, with Changi Airport due to double in capacity when both terminal 4 and 5 are opened, we expect the resulting increase in traffic throughput to benefit SATS. In the near-term, we expect SATS’ continuous efforts on tight cost management and productivity gains through adoption of new technology and relevant training for its employees will help sustain its operating margins.

Fairly valued for now

All said, with management guiding for sustainable growth in dividend payout similar to trend seen between FY14 and FY16, we believe SATS is currently fairly valued based on our unchanged DDM-derived FV of S$4.20. Maintain HOLD, supported by FY17F div. yield of 3.9%.

Source: OCBC Research - 15 Jun 2016