SINGAPORE (Apr 19): CIMB Research believes potential investments by SATS’ biggest shareholder Temasek Holdings could birth a global giant in airline catering and ground handling services.

The state-owned investment firm, which holds a 43.2% stake in SATS, is said to be mulling stakes in two subsidiaries of debt-laden Chinese conglomerate HNA Group Co – Swissport Group and Gategroup Holding.

Swissport offers ground and cargo handling services at airports, while Gategroup is an airline caterer.

See: SATS’ biggest shareholder Temasek said to mull stakes in 2 HNA-owned ground services, airline catering companies

According to CIMB, Swissport and Gategroup achieved FY17 revenues of US$3.5 billion ($4.6 billion) and US$4.6 billion, respectively. In comparison, SATS registered full-year revenue of $1.7 billion in FY17.

“The market could be hoping for a three-way collaboration,” says CIMB analyst Lim Siew Khee in a Wednesday report. “Assuming Temasek manages to acquire meaningful stakes (and board seats) in both Swissport and Gategroup, we think there could be some form of collaboration in the long term.”

However, she warns that the excitement could be “premature for now”.

“In the near term, we expect all three groups to run independently as part of Temasek’s portfolio,” Lim says.

In addition, she notes that SATS has its plate full for now.

“We think SATS’ focus in the near term is to seal a deal with Turkish Airlines to expand a new kitchen (potentially 50/50 ownership) in Instanbul in phases. This could take up to two years to see meaningful contribution,” Lim says.

“In addition, its JV with AirAsia Malaysia which started operating in November 2017 would likely see some start-up costs in the next one to two quarters,” she adds.

As such, CIMB is keeping its “hold” call on SATS with an unchanged target price of $5.17.

“At 22x CY19F P/E, we think the stock is fairly priced as we expect single-digit earnings growth ahead,” Lim says.

As at 11.25am, shares of SATS are trading 5 cents up at $5.50, implying an estimated price-to-earnings ratio of 25.6 times and a dividend yield of 3.1% for FY18.