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From: UOB Kay Hian | |
| Current Price : S$2.20 Fair Price : S$1.90 | |
| We downgrade Singapore Airport Terminal Services (SATS) to SELL from BUY and establish a fair price of S$1.90. Weak 1QFY07 results extended a succession of quarters in which SATS was not downgraded only on the promise of a possible divestment. Weak growth in aviation services coupled with declining margins resulted in near net-zero growth. Our confidence has waned in management assurances that growth would continue via overseas partnerships at other Asian airports. Based on revised earnings forecast and historical averages, our fair price reflects FY07 PE of 11.7x and PB of 1.5x. | |
| * SATS no longer enjoys a benefit-of-the-doubt premium on the promise of divestment by parent Singapore Airlines (SIA). SIA has indicated they will not restructure. | |
| * Competition has increased and SATS is managing only weak top line growth due to margin contraction. | |
| * Management has maintained that tie-ups with overseas partners were desirable, yes, but also implied they were imminent. These have failed to materialize. | |
| Our hand had earlier been withheld from downgrading the recommendation and cut in earnings and sales forecasts by the twin promise of divestment and overseas growth. However, the time is ripe for this 20% reduction in FY07 sales forecast and a sharp 30% cut in our FY07 earnings forecast. No silver lining offers itself on the horizon. On the basis of average PE and PB, fair price for reentry is established as S$1.90. Downgrade from BUY to SELL. |