• Unlikely to see margins recover yet
• May benefit from Qantas’ return
• Maintain HOLD

Higher Traffic Does Not Mean Higher Margins

For the period between Jan and Jul 17, Singapore’s Changi Airport recorded strong traffic statistics as passenger throughput rose 5.5% YoY, and aircraft movements grew 3.1% on the back of encouraging tourism data in Singapore. According to Singapore Tourism Board, visitor arrivals (by air transport) between Jan and Jun 17 registered a healthy 5.2% YoY growth, driven mainly by visitors from Australia, China, India and Indonesia.

SATS Ltd (SATS) is a provider of gateway services (GS) and food solutions (FS) at Changi Airport and we estimate it handles close to 80% of the traffic throughput there. Hence, we believe the traffic growth recorded is positive for SATS.

That said, passenger yields remain weak for the airline industry, which translates to pressure on SATS’ margins as its airline customers will likely engage in cost management efforts, especially for its low cost carrier customers.

Qantas Return to Changi Airport May Potentially Benefit SATS

Australia-listed Qantas Airways Ltd (Qantas) announced recently the extension of its partnership with Emirates for another five years (subject to government and regulatory approval), while making certain changes to the collaboration. Notably, there are two key changes from 25 Mar 18 onwards:

1. Qantas will re-route its daily Sydney-London A380 service via Singapore rather than Dubai, to replace one of the existing two daily Sydney-Singapore A330 services, and
2. Qantas will upgrade one existing daily Melbourne-Singapore flight from an A330 to an A380, with the second three per week service increased to a daily A330 service.

In essence, these changes will be positive for traffic growth at Changi Airport, and if SATS does secure FS and GS contracts from Qantas, it may further provide a lift to its earnings.

Re-engage Closer to S$4.70 or Lower

All considered, we prefer to wait for its 2QFY18 results for clarity over its margins and keep our forecasts unchanged. Maintain HOLD on SATS with a S$5.05 FV, but would look to re-engage below S$4.70.

Source: OCBC Research - 18 Sept 2017