SATS' share price was hammered in 2011 overshadowing the fact that it operates a solid franchise with barriers to entry, enjoys robust cash flow and has a strong history of paying dividends. We acknowledge revenue and cost headwinds but believe that SATS' strong operational base provides stability, with Daniels disposal adding to the war chest. The cash balance (~23% of market cap) will result in growth-inspired M&A or bumper dividend payouts. We set a target price at SG$2.40 based on 3 year average p/e of 14.1x and average of FY12/13 EPS. Outperform with 12% implied upside and 5.7% yield.

Airport servicing is a good business to be in. There are competitive moats, opportunities to build franchises and typically customers are sticky. However it remains a proxy on global demand. 5 headwinds for SATS include: 1) Singapore passenger growth slowing after strong 2010, 2) SIA growth slowing, 3) flat cargo growth, 4) Low cost carriers growing faster than full service operators and 5) ASIG entering as 3rd operator at Changi. We have included these in our forecasts, but feel the market has reflected these concerns having pushed SATS share price down in 12 months.

There are 5 reasons we like SATS as a dividend play: 1) a short cash conversion cycle, 2) contract-based revenues limiting downside risks, 3) low gearing, which is decreasing post the SG$300m disposal of Daniels (cash is ~23% of market cap), 4) low capex requirements (~SG$65m annually), 5) a track record of decent payouts even through downturns (through 2008-2009 payout ratio stayed above 70%).

We see three opportunities for growth: 1) Overseas markets: associates in India and a return of traffic in Japan after the 30% YoY decline YTD. 2) SATS is bidding to manage the International Cruise Terminal at Marina South, which could bring in 1.6m tourists a year by 2015 and 3) M&A: with low gearing and ~SG$450m cash on hand post-Daniels disposal, there is a war chest if the opportunity emerges.

SATS shares are down 25% (12m), but it's a good franchise and business to be in despite the soft global demand environment. We see EPS Cagr of 9% into FY2014CL and set a target price of SG$2.40 based on 3-year average PE of 14.1x FY12/13 EPS suggesting 12% upside with 5.7% yield. Outperform. (Read full report)