OCBC Investment Research 2015-06-26: SATS - Maintain HOLD, FV Increases from S$3.11 to S$3.22

SGinvestors.io

SATS Ltd: Growth remains modest after contract win 

• Multi-year contract win worth S$325m 
• Revision to forecasts 
• Slightly higher FV; maintain HOLD 

Contract win likely not material on group level 

• SATS Ltd (SATS) recently announced that its 59.4%-owned Japanese subsidiary, TFK Corporation (TFK), won a multi-year inflight catering contract from Delta Air Lines (Delta), estimated to be worth ~JPY30b or ~S$325m, assuming that the contract gets renewed upon expiry of its initial term. 
• Post transition to TFK, Delta will close down its own inflight kitchen, when catering services to Delta at two international airports in Tokyo commence by Oct 15. 
• While SATS is tight-lipped over contract details, we assume the initial term is five years with an option to renew an additional three years, deriving ~S$41m in annual contribution to SATS revenue. 
• In our view, margins will continue to be pressurised on intense competition, but the increase in scale should result in improved operating efficiency at TFK, though contribution to bottom-line at group level is likely not material. 

Tourism outlook in Singapore to remain modest 

• SATS’ core businesses in food solutions and gateway services are directly affected by tourism growth in Singapore, which is the main driver for air traffic growth. 
• For the first four months of 2015, arrivals by air declined by 5.2% YoY. However, we expect these statistics to improve as Singapore: 
  1. hosted the 28th SEA games over the month of Jun 15, and 
  2. is engaging in aggressive marketing for SG50 celebrations, which may drive up visitor arrivals. 
• STB expects tourism numbers to grow modestly between 0% and 3% for 2015. However, according to a recent report by CAPA, the number of visitors coming to Southeast Asia ex-Thailand shrunk between 2013 and 2014, as well as between 1Q14 and 1Q15, as Chinese tourism preferences are shifting from Southeast Asia to Northeast Asia. 
• Chinese visitors made up a substantial ~16% of Singapore’s total visitor arrivals in 2014. 

Revision to our conservative forecasts; maintain HOLD 

• Incorporating TFK’s contract and revising our initially conservative forecasts, we bump up FY16F/17F PATMI slightly by 3.7%/3.0%. 
• We remain cautious as we opt to wait for stronger indications of air traffic growth. 
• Consequently, our FV increases from S$3.11 to S$3.22 (still based on 16.5x FY16F EPS). Maintain HOLD on SATS. 

(Eugene Chua)

Source: http://www.ocbcresearch.com/