SINGAPORE (July 20): Analysts say an improved outlook for SATS on various levels outweigh any potential impact from the termination of its agreement with Turkish Airlines for the provision of in-flight catering services to airlines at the Istanbul New Airport.

“Following cessation of discussions with Turkish Airlines over the development of a flight kitchen in Turkey, we now raise our DPS going forward by 1 cent and 2 cents for FY19F and FY20F respectively,” says DBS Group Research’s lead analyst Alfie Yeo in a Friday report.

“We have not factored in development of Turkey into our [target price] and earnings and are hence neutral on the termination of the MOU,” he adds.

DBS is keeping its “buy” call on SATS with a marginally higher target price of $5.65, raised from $5.64 previously.

“While the MOU with Turkish Airlines has ceased, there are new catalysts for the stock in the form of better outlook in Japan; freeing up of financial resources from the MOU to pursue other deals and to pay out more dividends; and faster-than-expected ramp-up of Terminal 4,” Yeo says.

According to Phillip Securities Research analyst Richard Leow, SATS’s Tokyo-based in-flight kitchen subsidiary, TFK Corp, saw a 3.1% increase in revenue on the back of higher meal volumes.

Meanwhile, its Kunshan central kitchen on the outskirts of Shanghai has already turned profitable after two years of operations, ahead of expected, and its Langfang central kitchen on outskirts of Beijing is expected to follow suit.

“The Kunshan and Langfang central kitchens are poised to benefit from urbanisation and demand for safe, high-quality food,” Leow says in a Friday report.

“In addition, the cruise terminal at Marina Bay Cruise Centre Singapore (MBCCS) benefitted from higher ship calls and increased passengers handled,” he adds. “MBCCS has turned around and ship calls are expected to be sustained.”

As such, Leow believes the outlook is “positive” for the gateway services and food solutions provider.

Phillip is maintaining its “accumulate” call on SATS with an unchanged target price of $5.58.

“SATS has been investing in technology to boost productivity in anticipation of higher volumes, with staff cost (variable cost) progressively replaced by depreciation (fixed cost),” he says. “We like the stock for its regional expansion story and growth initiatives.”

SATS on Thursday reported an 11.5% rise in earnings to $63.9 million for the 1Q ended June, from $57.3 million a year ago.

1Q18-19 revenue grew 3.0% to $439.4 million, as revenue from its food solutions and gateway services segments grew 2.7% and 3.4%, respectively.

See: SATS reports 11.5% rise in 1Q earnings to $63.9 mil; Turkish Airlines agreement mutually terminated

Shares of SATS closed 7 cents higher at $5.17. According to DBS estimates, this implies an estimated price-to-earnings multiplier of 21.1 times and a dividend yield of 3.8% for FY19.