• Up 7.6% over last five trading sessions
• Some growth in Changi Airport
• Downgrade with limited upside

Diminishing Upside Post Share Price Appreciation

Post our downgrade on 9 Nov and the release of its 2QFY19 results, the share price of SATS Ltd has dropped by 9.1% compared to the STI’s 0.2% fall over the same period, based on the closing price on 28 Nov. We upgraded our rating to BUY on 29 Nov, and the share price of SATS has risen by 6.2% till the closing price on 10 Jan. At current levels, we see diminishing upside in the near term after the price appreciation.

Some Growth in Operating Statistics at Changi Airport

Singapore’s Changi Airport has posted mixed operating statistics for Nov 2018 as passenger throughput grew 4.5% YoY, aircraft movements fell1.3% and air freight movements rose by 2.5%. For the period from Jan – Nov 2018, YoY growth for passenger throughput was 5.6%, 1.9% for aircraft movements and 3.6% for air freight movements.

In general, these growth figures were weaker compared to the growth that we saw in Jan-Nov 2017 vs. 2016. Traffic growth at Changi Airport has a direct impact on SATS as we estimate SATS to handle about 80% of the traffic throughput there. In the longer term, the addition of Terminal 5 to Changi Airport (construction to begin 2020) will benefit SATS since it is the dominant ground handling provider at Changi Airport.

Monitoring Pricing Pressures From Airline Industry

Trade tensions and weaker sentiment have impacted emerging market currencies and trade volumes. Competition in the airline industry may also continue to result in pricing pressures on SATS, though the lower oil price is a near term reprieve for the industry.

SATS is currently trading at 20x forward P/E, close to the historical average over the last five years. At current price, the forecasted dividend yield is about 3.9%.

Meanwhile, we update our cost of equity assumptions and our DCF-based fair value estimate slips slightly from S$5.34 to S$5.23.

Source: OCBC Research - 11 Jan 2019