SINGAPORE (Sept 13): UOB Kay Hian is maintaining its “buy” call on SATS with a target price of $5.40 as Changi International manages to win back Qantas.
Australia’s flagship carrier announced that from next March, it will shift its transit hub from Dubai to Singapore for its kangaroo routes, with the Sydney-London services transiting out of Singapore.
See: Qantas reroutes Sydney-London A380 flights via Singapore to meet strong Asia demand
In a Wednesday report, analyst K Ajtih says Qantas will likely choose SATS for its inflight catering, ramp handling and cargo handling services, instead of Emirates-owned Dnata.
This is because SATS is not owned by a competing airline and the group is already providing ground handling and catering services to Qantas’ sister carrier, Jetstar Asia.
Qantas reportedly will be adding more one-way seats from Singapore to UK as well as from Melbourne to Singapore. These long-haul routes will benefit SATS as there will be proportionately more unit meals on both routes.
The two routes will also feature wide-bodied aircraft that will lead to greater value-added ground handling revenue.
“On balance, we believe that Qantas could boost SATs local inflight catering and ground handling revenue by 3% and boost net profit by a similar proportion,” says Ajith.
Meanwhile, low-cost carrier Norwegian Air will be launching four times weekly flights to Gatwick from Sept 28.
“Here again, we believe that SATS is likely to emerge as the preferred inflight caterer (yes, Norwegian Air offers meals) and ground services provider, due to the fact that it is not aligned with a competing carrier,” says Ajith.
The group is highly leveraged to cargo traffic growth and since cargo throughput at Changi rose 11.2% y-o-y in July, this holds a scope for a good 2Q18.
Over the past three months, global air cargo has also been rising and this should boost gateway services revenue for associates in Indonesia, Hong Kong, Taipei, Beijing and Tianjin.
The analyst does not expect any negative surprises over the next two quarters as the commencement of ground handling services to AirAsia in July and catering services to Jetstar Asia in August will further boost the group’s 2Q earnings.
With Changi’s latest FAST check-in services, the group’s margin may see an improvement in 2H18 and FY19 as this reduces the need for related labour.
As at 10.18am, shares in SATS are trading $4.81 at 22 times 2018 forward earnings with a dividend yield of 4.0%.
