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Business Times - 05 Feb 2011

SATS likely to face rising cost pressures


This prompts some analysts to downgrade the stock; other concerns include integration of new acquisition TFK Corp

By NISHA RAMCHANDANI

(Singapore)

GROUND-handler SATS is expected to face intensifying cost pressures from rising food prices and potential competition from the entry of a third ground-handler at Changi Airport, prompting some analysts to downgrade the stock this week.

For the third quarter ended Dec 31, 2010, SATS posted a 4.1 per cent year-on-year drop in net earnings to $51.2 million on the back of higher costs.

Revenue rose marginally, up 1.5 per cent to $440.9 million, as gains from its aviation revenue were offset by a fall in non-aviation revenue, which was hurt by the weaker British pound as well as a three-week cut in the accounting period for its UK-based food manufacturer Daniels Group.

Analysts flagged worsening inflationary pressure on food materials as a key risk.

'Although management strives to pass on cost increases to its customers and broaden its food sources, we believe there would likely be a time lag,' DBS Group Research said in a research note.

Another concern is the integration of its latest acquisition, TFK Corporation. Last year, SATS announced that it was acquiring a 50.7 per cent stake in Japan- based airline caterer TFK from Japan Airlines International Co Ltd (JALI) for 7.8 billion yen (S$121.55 million). The acquisition was completed in late December.

'Urgent action needs to be taken on broadening TFK's customer base beyond JAL and to rein in the cost structure, especially where wages are concerned. If all goes well, management expects TFK to be profit neutral in FY12 before turning earnings accretive in FY13,' wrote Kim Eng analyst Gregory Yap in a research note.

Kim Eng downgraded its call on the stock to 'hold', trimming its target price from $3.48 previously to $2.93, while CIMB maintained its 'underperform' rating on SATS, with a target price of $2.42.

DBS Group Research also called a 'hold' on the stock and cut its price target from $3.13 to $2.94, pointing out that there is still uncertainty as to how SATS will be impacted by the entry of a third ground handler at Changi in the first quarter of this year.

SIA Engineering Company (SIAEC), a part of the Singapore Airlines group, is among those in the running, which could mean stiffer competition if SIAEC bags the licence.

However, Phillip Securities Research remained upbeat on the stock, maintaining a 'buy' call with a target price of $3.30.

It said that while SATS has to contend with rising food prices and the depreciating British pound, it expects SATS to benefit from the influx of tourists into Singapore as the travel industry continues to register growth.

CIMB also noted that SATS has gained a 10 per cent market share for technical ramp handling at Changi since it was granted a full apron handling licence in May last year.

The counter closed four cents lower at $2.76 on Wednesday.

SATS releases results 4Q and Full-Year results on 16 May 11.

(Vested)
(25-04-2011, 07:40 PM)kazukirai Wrote: [ -> ]SATS releases results 4Q and Full-Year results on 16 May 11.

(Vested)

Hey Kuzukirai, any idea how much the 3rd ground handler will impact SATS earning?
(26-04-2011, 08:48 AM)Thriftville Wrote: [ -> ]Hey Kuzukirai, any idea how much the 3rd ground handler will impact SATS earning?

Hi Thriftville,

No idea but let's look at the broad trends.

Changi Airport saw 10,885,926 and 9,941,334 passengers in Jan-Mar '11 and Jan-Mar '10 respectively. (source)

SATS handled 8.79M and 8.51M passengers in those same periods (source)

Of course, SATS' numbers include their overseas operations but SG ops account for most of their profits so that's a good approximation. So while a third ground handler will definitely take some business from them, we must also remember that the pie is growing. Passenger arrivals to Changi Airport has grown quite substantially y.o.y and from Changi Airport's own statistics, (they say they can handle up to some 73M passengers a year. source) there's still a lot of room for the Pie to grow from last year's figure of 42M passengers.

Of course, this doesn't mean that the near-term risks like high oil prices or run-up in commodity prices aren't going to affect SATS. I'm just saying that in the longer-run, there is room for the pie to grow.

And I'm also not saying that there is adequate margin of safety at current prices.
Thank you Kuzukirai for sharing!
The tourism board give quite a good projection for tourist arrival in future (about 10% increase per annum). but from the figures, the passengers SATS handles only up by 3%. Is it due of competition from other low-cost handlers?

Do you think SATS can increase the price for ground handling services? because if the government allows a small price adjustment, then it may translate to a significant increase in profit for the company.

(vested)

(26-04-2011, 10:10 AM)Thriftville Wrote: [ -> ]Thank you Kuzukirai for sharing!
The tourism board give quite a good projection for tourist arrival in future (about 10% increase per annum). but from the figures, the passengers SATS handles only up by 3%. Is it due of competition from other low-cost handlers?

Do you think SATS can increase the price for ground handling services? because if the government allows a small price adjustment, then it may translate to a significant increase in profit for the company.

(vested)

Hi Thrift,

Great observation! It could very well be that they have lost market share due to the entrace of the 3rd ground-handling company. Can they raise the price? I don't know about that since I don't have inside industry knowledge but I would think not since they are now faced with extra competition.

My broad thesis before looking at the figures was the potential increase in air-travel in the years to come.

No doubt that will depend very much on how well the economy does but I think LCCs have changed the industry fundamentally and made it more affordable for people to travel and travel frequently which leads to an increase in the services that an airline requires.

Maybe you could share your reasons for buying into SATS?
Hey Kuzukirai, I've read from analyst report that the global outsourcing business is worth many billions. Many airlines may start to outsource their catering, ground handling & security services. SATS has been working hard to get more contracts overseas.

What i like about SATS are:
1. Lower overhead & fuel risk compared to SIA.
2. Almost sure win contracts with SIA & gov for catering services
3. Potential growth in aviation segment due to tourism.
4. High domestic demand as Sg people like to travel

Cons:
1. Low margin for catering services
2. Quite a competitive industry. They lost the catering contract to Tong Lok for the integrated resorts.


Is it true that SIA is setting up another baggage handler ? After all, SIA is no longer a shareholder of SATS. Food inflation is a factor as well. They are expanding into pig farming in China - is this the first step to creating a vertically integrated food processor ?
(26-04-2011, 01:35 PM)Nick Wrote: [ -> ]Is it true that SIA is setting up another baggage handler ? After all, SIA is no longer a shareholder of SATS. Food inflation is a factor as well. They are expanding into pig farming in China - is this the first step to creating a vertically integrated food processor ?

I think the gov is considering a 3rd handler, after the swiss handler left few years ago...

Ya, they are trying to do vertical integration. Not too sure if this model will cause them to lose focus on core business.
To be honest, the entry of a 3rd ground handler may not impact much on SATs's share. Look what happened to Swissport the last round. Came in, made a big bang, but not much share of the market, coz even though they came in with new equipment and stuff, the established incumbents already had all of the rapport with the airlines using changi airport. So unless the incoming 3rd ground handler has the financial clout to cut prices drastically to gain market share, at least for the first few years, it's unlikely to make much of a dent on SAT's dominance. Generally, if it ain't broken, don't fix it. Alot of business in aviation is carried out on a "guanxi" basis. If "A" Airline has been working with "B" Supplier of Services for quite a while, they are unlikely to want to break this harmonious relationship, as over a period of time, goodwill is accumulated, which eventually facilitates better business relationships.
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