Weaker  cargo  volume  drags  down  revenue  growth.  3QFY13  is  SATS'  seasonally stronger quarter, with increased year-end travelling. This is evidenced by its record number of flights and passengers handled during the quarter. However, QoQ revenue growth was flat (+2.0%), as cargo volumes were lower, due to the global economic slowdown. Demand for airfreight is expected to remain weak over the next few quarters. Nonetheless, we think SATS' aviation revenue is  likely  to  grow  strongly  going  forward,  supported  by  rising passenger travel through Changi.

Margins stabilizing? While 2QFY13 margins were good (its highest over five consecutive quarters), 3QFY13 margins were relatively unchanged vis-à-vis 3QFY12. We think margins will  remain  under  pressure  going  forward.  As  staff  costs  rise  due  to  increased  hiring  and government  levies,  SATS  would  have  to  continually  manage  costs  and  improve productivity to keep staff costs at the current level (~43% of revenue).  Any easing of food inflation would however help SATS to improve its margins.

Maintain  NEUTRAL.  We  continue  to  like  SATS  for  its  stability,  steady  dividends  and strong  balance  sheet.  Outlook  is  supported  by  growing  air  passenger  traffic,  partially shadowed by weaker demand for airfreight. Earnings growth would be under pressure from rising operating costs. Positive contribution from the ICT is expected from FY14. In view of the  better  outlook  for  air  passenger  travel,  we  have  lowered  our  WACC  assumptions slightly and arrive at a revised TP of S$2.83.

Source: OSK