SINGAPORE (Feb 14): DBS is maintaining its "hold" on SATS, advising investors wait for a share price correction to buy while CIMB is maintaining its "buy" given it remains positive on its long-term prospects.
These include passenger and air traffic growth at Changi Terminal 4; automation and staff productivity driving modest cost increase and better margins in the next few years; the development of a flight kitchen in Turkey; and the opening of Terminal 5, says DBS lead analyst Alfie Yeo in a Wednesday report.
While the structure of SATS’ partnership with Turkish Airlines has yet to be finalised, Istanbul New Airport, when fully completed, is expected to be the largest airport in the world, serving up to 150 million passengers a year.
DBS lead analyst Alfie Yeo says this could add significantly to meal volumes and revenue, given that Istanbul’s Ataturk airport handled 44 million international and 19 million domestic passengers and over 300,000 international and 143,000 domestic aircraft movements in 2017, provided SATS has a substantial interest in the new business.
According to analyst Lim Siew Khee, SATS will share more details on the final structure of its JV with Turkish Airlines in 4Q18. Management also shared that it would expand its new kitchen in Istanbul in phases and the process would take two years.
There is also a possibility that the new airport in Istanbul could be ready by end-2018, in which Turkish Airlines would need an interim kitchen and SATS may or may not be the partner.
"We assume the JV will be a 50/50 ownership and contribution to begin in FY20," says Lim.
In 3Q18, revenue came in flat at $439 million. EBIT margin was at 14.9%, slightly lower than 3Q17's 15.1%. Staff costs were well controlled at 47% of revenue vs 48.8% in 3Q17. However, these positives were offset by the increase in licensing fees and other costs due to higher fuel costs and absence of some incentives from Changi Airport.
Associate profit contribution from gateway dropped 5% y-o-y to $10.6 million as it included the full quarter impact of de-consolidating SATS HK. Excluding this, associates in Indonesia are holding up well, in line with the strengthening of the cargo market.
Revenue from Japanese subsidiary TFK dropped3.5% y-o-y in 3Q18, due to the effect of volume decrease following the loss of Vietnam Air's in-flight catering to ANA, as well as the shifting of Delta's Asian hub from Tokyo to Shanghai. The new contracts TFK has secured will only start to contribute in the next few months.
The JV with AirAsia started operations in Nov 17 but the transaction was only formally concluded in Jan 18. Management shared that there were some startup costs involved.
"We raise our FY19-20 EPS by 9% to reflect lower staff costs and increased revenue from Turkish Airlines. Our target price is raised to $5.17, still based on 20 times FY19 earnings," says CIMB's Lim.
"We are maintaining our 'buy' call, with a higher target price of $5.67, giving a total potential upside of 12% including dividends," says DBS' Yeo.
As at 4.16pm, shares in SATS are down 4 cents at $5.20 or 21.1 times DBS' FY19 earnings.
