SATS: Credit Suisse initiates coverage with ‘Outperform’

SATS airport services includes handling of airfreight, passengers, ramp handling, baggage, aviation security and aircraft interior cleaning.

Analyst: Chua Su Tye

CREDIT SUISSE initiated coverage on Singapore Airport Terminal Services (SATS) this week with an ‘Outperform’ rating and target price of S$3.30.

SATS is a Singapore-based global provider of airport services, in-flight catering and food solutions.  It serves more than 80% of scheduled flights out of Singapore’s Changi Airport. 

Given its dominant position in ground handling and in-flight catering services at Singapore’s Changi Airport that is supported by an expanding Pan-Asian network, SATS is a compelling play into a global recovery, according to analyst Chua Su Tye.

With the opening of the two integrated resorts, passenger traffic will be boosted by an increase in tourist arrivals.

The analyst also expects cargo volumes to improve in line with the global recovery.

The aviation sector is cyclical, but SATS' acquisition of Singapore Food Industries in April 2009 will diversify SATS’ earnings profile, says the analyst.

Based on Thu’s close price of S$2.63, SATS has an attractive dividend yield of a 5%.

Furthermore, dividend payout ratio may increase --- the analyst has forecasted its flow will rise to S$224 million by the end of FY2013.

1) The exposure of its operations to the aviation sector, which is cyclical in nature,

2) Customer concentration, with about a third of its total revenue generated by SIA,

3) Potential margin erosion, with volume growth led by low-cost carriers and

4) Raw material costs, which account for about 40% of revenue post-SFI.