SINGAPORE (Nov 13): Maybank Kim Eng is upgrading its recommendation on SATS to “buy” from “hold” previously with a target price of $5.70, following the group’s developments over the past month that may contribute to its medium-term growth.
On Oct 17, SATS announced that it will be providing Turkish Airline (THY) and other airlines in-flight catering services at the Istanbul New Airport.
See: SATS to provide catering services to Turkish Airlines at Istanbul airport
In a Monday report, analyst Neel Sinha says that the details of this deal are scant and in the early stages, but the analyst believes that SATS kitchen would have a lot of potential to target new airline customers over the medium term.
This is due to THY being amongst the largest airlines in the world by destinations, carrying about 12% more international passengers than Singapore Airlines, as well as the Istanbul airport expecting to be one of the largest in the world, with a capacity of 90 million passengers in the first phase of development.
Meanwhile, the group on Oct 30 announced that it will be partnering AirAsia to grow its ground handling business across Asean, as it provides access to the Malaysian market for gateway services.
See: SATS partners AirAsia to grow ground handling business across Asean
However, the street has some concerns that this comes at the expense of SATS giving up its 40% stake in Singapore Changi Terminal 4.
“We note that AIRA carried 56.6 million passengers in 2016 (26.4 million were with its Malaysian operations) versus Changi Terminal 4’s capacity of 16 million,” says Sinha.
The analyst says the real upside with this joint venture lies with acquiring new airline customers in the 15 odd Malaysian airports that AirAsia has operations in.
In addition, Qantas announced that it is moving its connecting hub for UK flights back to Singapore from March 2018 after a five year hiatus, which the analyst deems as incrementally positive for SATS.
See: Qantas reroutes Sydney-London A380 flights via Singapore to meet strong Asia demand
And in key non-aviation ventures, the group’s first large scale commercial kitchen in China is ramping up well with about 18- 20 customers already on board since commencing operations mid-2017. The group is also on track to construct a second commercial kitchen in China.
As at 12.40pm, shares in SATS are trading 13 cents higher at $5.14 or 3.5 times Fy17 book with a dividend yield of 3.4%.
