SI Research: SATS – A Decent Entry Point For The Long Run?
In June 2017, SI Research believed in SATS’ potential despite the assigned street target price of $5.05 against the group’s share price of $5.11.
While SATS’ share price fell below $5 in late-July 2017 and remained so until mid-November 2017, investors holding on would have been decently rewarded when the group’s shares reached its all-time high of $5.85 on 19 January 2018. In addition, the capital gain of approximately 14 percent excludes dividends of $0.17 per share.
However, the group’s share price went South around after the announcement of new taxes at Changi Airport. Starting from July 2018, passengers departing from Changi Airport will have to pay higher fees and charges to partly fund the Changi East development, which includes the construction of Terminal 5. Meanwhile, airlines will also pay more in aircraft parking and landing fees.
How would the new taxes affect SATS and could the decline in share price present an opportunity for investors?
Impact Of Higher Taxes
The cost for passengers departing from Changi Airport will increase by $13.30 to $47.30 from July 2018. Subsequently, the cost will increase by $2.50 per year and the all-in fees will reach $62.30 by 2024, almost double that of the current cost of $34.
The demand for air travel is sensitive to changes in air travel prices and incomes. However, the degree of sensitivity will vary according to different factors such as the purpose of travel as well as flight length.
In general, business travellers are less sensitive to travel price changes than leisure travelers. In terms of flight length, travellers on short-haul routes are more sensitive to than on long-haul routes.
Over the years, travellers have become more sensitive to price, due to the boom in low cost travel, price transparency and the intense competition. On the other hand, travellers are becoming less sensitive to price, as increasingly lower air travel prices, also means that the cost of air travel itself becomes a less impactful on the total cost of a typical journey.
It is without a doubt that the higher cost will result in a negative impact on the industry. However, the impact is unlikely to be significant enough to warrant the decline in SATS’ share price.
Financial Performance
For 9M18, SATS’ revenue held steady despite the deconsolidation of SATS HK, which the group has divested 51 percent interest to Voltaire Capital Investment in July 2017. Meanwhile net profit gained marginally by 2.5 percent mainly due to higher share of results of associates and joint ventures.
(Source: Shares Investment)
SATS maintains a strong financial position with a debt-to-equity ratio of just 6.4 percent. In addition, the group’s massive cash balance of $426.6 million places it in a net cash position of $323.9 million. We view this favourably, especially in a rising interest rate environment.
Growing Abroad
Having secured a dominant position in Singapore, SATS continues to grow its presence overseas.
In December 2017, SATS, in a joint bid with Cargo Service Center India, won a cargo handling concession contract in Chhatrapati Shivaji International Airport in Mumbai, India. Commencing in April 2018, the concession will run for 18 years. The latest win will extend cargo network connectivity for SATS and strengthen the group’s foothold in India.
Although it has yet to be finalised, another growth catalyst for SATS is the potential partnership with Turkish Airlines (THY) for the provision of in-flight catering services to THY and other airlines at Istanbul New Airport.
A Star Alliance member, THY, is a four-star airline with a fleet of 329 aircraft flying to 300 destinations worldwide with 251 international and 49 domestic destinations.
Istanbul New Airport, which is expected to be inaugurated in October 2018, will be the largest airport in the world, carrying a 150 million annual passenger capacity, while remaining upgradable to 200 million annual passengers. This could potentially be a significant contribution to SATS’s revenue depending on the group’s level of interest in the new business.
Attractive Re-Entry Point
Based on the above, we believe that SATS’ share price reaction towards the new taxes could be considered as an overreaction.
The group’s valuations have come down to the level which we last seen in our previous coverage. In view of the growing global air travel demand, we believe that there is much opportunity for the group in the long run.
