Yield and growth
SATS offers a good dividend yield of 5%, backed by net cash of S$270m. It is our preferred pick relative to the other two airport services/MRO proxies for its cheaper valuations and stronger earnings growth.
We adjust our expectations for food solutions to account for weaker yoy revenue from Japan’s TFK. Our EPS is cut by 3% for FY14-16 . Accordingly, our target price is reduced to S$3.77, still based on 17.7x P/E or 1 s.d. above its 5-year mean. Catalysts are stronger-than-expected dividend payouts and a rebound in TFK. Under our new rating structure, our call changes from Outperform to Add.
Growth slightly dampened by forex and Qantas’s withdrawal
SATS’s earnings growth would have been stronger if not for the weak yen, which resulted in lower revenue from its Japanese subsidiary, TFK. FY14 will see a full year’s impact for its Singapore food solutions revenue due to Qantas’s move to Dubai for long-haul flights. However, we continue to expect FY14 EPS to grow 10%.
Cheaper and stronger earnings growth
Despite offering stronger double-digit earnings growth (12%), SATS is trading at a discount compared to the other airport services/MRO proxies, SIA Engineering and ST Engineering (18x P/E with 5-6% earnings growth). In terms of P/BV, SATS is also trading at a 50% discount to peers at 2.4x despite rising ROE.
We like SATS as a proxy for steady growth in Changi passenger numbers. Other catalysts include the finalisation of the acquisition of Singapore Cruise Centre (steady +2% EPS from FY15 onwards) and the cargo JV with Oman Air and Oman Airport Management, which will enable SATS to penetrate the Middle Eastern hub (better margin on gateway services).
Publish date: 02/12/13