SINGAPORE (Nov 10): OCBC and DBS are maintaining airport gateway services provider SATS at “buy” given several positive long-term growth drivers.
SATS recently entered into a ground handling partnership with AirAsia that is expected to start before end FY18.
The partnership will expand SATS’ footprint to some of the busiest airports in Malaysia while allowing AirAsia to take a stake in its Changi Airport Terminal 4 ground handling entity.
“We view this partnership positively as it creates opportunities for SATS to explore expansion into Indonesia, Philippines and Thailand, of which AirAsia already has an established presence in all three,” says OCBC analyst Eugene Chua.
Another potential partnership Chua deems positive is the one with Turkish Airlines relating to the provision of in-flight catering services to Turkish Airlines and other airlines at Istanbul New Airport.
“We continue to like SATS for its long-term growth potential from Changi Terminals 4 and 5. The recent memorandum of agreement signed with Turkish Airlines to invest in a catering company in Turkey will also support future growth if the development materialises,” says lead analyst Alfie Yeo of DBS in a report.
The new JV with AirAsia will also see SATS JV/associate network extend ground handling activities to an 88 million passenger traffic market in Malaysia, including KLIA, Penang, Kuching and Kota Kinabalu airports with further potential to service new airlines apart from AirAsia, adds Yeo.
To be sure, SATs’ 2Q18 results were boosted by JVs and associates. JVs and associate income grew 56.5% y-o-y to $18 million mainly due to improvement in Indonesian and Indian entities as well as Evergreen Sky Catering Taiwan and Beijing Kitchen. The quarter also recognised a one-off gain of $7.1 million from reduction of stake in SATS HK and restructuring of Jilin Zhong Xin Cheng Food Co. and SG IPF.
See: SATS posts 16.3% rise in 2Q earnings to $72.2 mil on higher overseas contributions
OCBC and DBS have target prices of $5.05 and $5.02 respectively.
The counter is trading 24 cents higher at $4.95 or 21.2 times DBS’ forecast FY18 earnings.