Share Price S$3.45
Target Price S$3.32
Takeaways From Company Visit And An Increase In Target Price
Pax throughput at Changi has been stronger than expected and this should translate into higher revenue. Meanwhile, a potential cargo JV in Oman will allow it to diversify to an important Middle Eastern gateway. Maintain HOLD but we raise our target price by 6% to S$3.32. Suggested entry price is S$3.15.
• We met with SATS to discuss its medium- and long-term prospects. We are enthused by a potential cargo handling JV in Oman, likely revenue accretion from a catering business at the Sports Hub as well as strong pax throughput at Changi. Consequently, we raise our DDM-based target price to S$3.32 from S$3.13 after raising our terminal growth rate assumption from 1.2% to 1.5%.
• Robust pax throughput at Changi leads us to raise our assumptions. Changi’s August pax movements rose 9.4% yoy from July’s 4.1% yoy. Anecdotal evidence points to the trend continuing as our channel checks have indicated a higher proportion of overseas visitors attending the F1 race on Sep 13. Consequently, we raise our FY14 pax growth assumption from 2.7% to 4.5% yoy.
• Potential cargo JV in Oman. SATS has signed a tripartite MOU with Oman Air and Oman Airport Management to develop and operate cargo facilities in Oman. The new terminal at the Muscat International airport will have the capacity to handle 260,000 tonnes of cargo, which is about a fifth of the tonnage that SATS handles at Changi. While the MOU is still subject to due diligence, we reckon there is a high likelihood of it going ahead as it will be beneficial for both parties. SATS will bring with it extensive cargo handling expertise and strong relationships with various cargo carriers. SATS will, in turn, be able to diversify its cargo exposure to an important Middle Eastern gateway. We reckon the JV will boost ROE as SATS is likely to use its cash reserves. Margins could be higher than that of domestic gateway operations, given that labour costs in the region are likely to be lower than that in Singapore.
• Commencement of Sports Hub in Apr 14. When operational in Apr 14, the Singapore Sports Hub (SSH) will feature a 55,000-capacity National Stadium, a 13,000-capacity indoor stadium centre, a 3,000-capacity sports hall, along with two other venues. SATS together with its JV partner Delaware North (a 70:30 JV) will operate 52 retail concessions at five venues and cater exclusively for corporate suites at the National Stadium and the Singapore Indoor Stadium. SATS will also operate a restaurant at the stadium. On top of that, SATS will provide local food such as hot dogs and chicken wings at five venues at the SSH. On a steady-state basis, SATS guided for S$50m in revenue. We believe margins could approximate that of the food solutions division’s 13.6%.
• Dividend payout unlikely to be affected. SATS indicates it is open to gearing up further to improve ROE. We take this to mean that dividend payout will not be affected by the latest acquisition of Singapore Cruise Centre (SCC). We expect SATS to generate recurring free cash flow (net of payout from JVs and associates) of S$117m for FY14 assuming it acquires 96.8% of SCC.
• We raise our FY14 net profit forecast by 2% to S$206m after factoring in higher pax throughput at Changi airport. We also raise our dividend payout for FY14 to 16.4 S cents from 16.0 S cents.
• Maintain HOLD but raise target price by 6% to S$3.32 (from S$3.13). The increase is due to changes to our terminal growth assumptions to 1.5% (from 1.2%) with an improvement in ROE from recent acquisitions and changes to our pax growth assumptions. Our valuation assumes riskfree rate of 3%, discount rate of 7.0% and terminal growth rate of 1.5%. Suggested entry price is S$3.15, or a 10% discount to projected total return.
Share Price Catalyst
• Announcement of a cargo JV in Oman.
• High staff costs arising from government levies and a tight labour market.
Publish date: 09/10/13