SINGAPORE (June 17): CGS-CIMB Research is maintaining SATS at ‘add’ given the stock is a proxy for secular growth in air travel although M&As may require investor to be patient in the short term.

CGS-CIMB says secular demand for travel is key growth driver for SATS. Over the past 19 years, SATS has seen an expansion of the food and gateway services it provided, with capacity handled growing from 22 million passengers in FY00 to 128 million in FY19.

Number of meals served also grew from 21 million to 167 million during the same period. In addition, SATS currently operates in 30 countries, and spans over 60 locations.

In a Friday report, analyst Lim Siew Khee says SATS has identified India and China as key focus markets and is keen to gain market share by buying out competitors.

“Buying out competitors in familiar markets to gain market share is a viable option with low business risks, in our view,” says Lim.

Analyst Lim Siew Khee notes how the company’s dividend payout was not compromised, despite a hefty $1 billion investment, due to its strong cash hoard and operations.

“This is a big picture and long-term question that SATS needs to address. The structural change in travelling patterns to become more economy and fuss-free means Asian full-service carriers may follow the path of some European and American airlines to opt for the low-cost carrier (LCC) model of pre-ordered meals,” she adds.

According to Lim, SATS has a three-year investment target of $1 billion, with $700 million to be M&A related.

To be certain, SATS has improved in its M&A execution over the past two years but given heightened investment mode over the next three years, Lim expects SATS’s M&A-related costs, including staff and business development costs, would also rise.

She says investors also need to factor in gestation for new M&As and has deferred its earnings growth expectations for associates from FY20F to FY22F.

“Accordingly, our EPS is trimmed. Maintain Add but lower target price to $5.40, based on 21.9x CY20F P/E, the historical three-year average,” says Lim.

To recap, it was business as usual for SATS’s flights handling segment in April although Changi’s data showed 1.7% y-o-y decline in number of flights.

“We believe the drop in volume was unlikely to be structural but due to the grounding of B737 Max and suspension of Jet Airways,” says Lim.

Lim says the aircraft-grounding effect on SATS was cushioned by the resumption of Qantas contract and new contracts won in 2H18. However, SATS was not spared the weaker freight volum as Changi’s data showed six straight months of y-o-y drop in freight volume and cargo also made up 25% of gateway revenue.

“We still forecast 4-5% y-o-y gateway revenue growth for FY20-22F,” says Lim.

As at 4:53pm, shares in SATS are down by 5 cents at $5.09 with with FY20F core EPS of 24 cents and at 3.27 times book value.