With the opening of Changi Airport Terminal 4, investors should look at how to cash in on this opportunity.
However, there is a more direct way to gain from the opening of Terminal 4. Furthermore, recent fall of prices is incongruent with the positive data coming out of Changi Airport.
In 1Q18, SATS gateway services gained 5.1% year on year (YoY), which was largely contributed by a rise in flight movements and cargo throughput at Changi Airport.
Higher margins from its gateway services have also led to a higher operating profit.
With Singapore’s gateway services accounting for an approximate 94% of the segment’s revenue, it is highly correlated to flights and cargos that were handled at Changi Airport.
By projection, 2Q18 is likely to show strong gateway services revenue. Supporting this, positive data was seen for two out of the three months in 2Q18 as flight movements increased by 4.3% and cargo throughput grew 11%.
In addition, the opening of Changi Airport Terminal 4 will bring in more revenue for SATS from the increase in gateway services.
Weakened by poor in-flight catering pricing?
Since FY2014, the pricing for SATS inflight catering has been slipping. But UOB Kay Hian Research (UOBKH) believes that the street had factored in the weakening pricing based on the current stock price.
Aggressive competition between Dnata and SATS and the margin pressure faced by airlines were the two main attributes for the poor performing segment.
However, there is a potential catalyst for the in-flight catering segment that might improve its performance through higher volume.
Norwegian Air has announced its intention to enter the Singapore market and Qantas has decided to shift its base back to Singapore.
Aside from the additional demand for in-flight catering, SATS may stand to gain from providing lounge catering for Qantas.
Bigger, better and stronger
Being 6 times larger than Dnata, SATS has the scalable advantage against its competitor when they engage in a pricing war. To quantify it, SATS handles 144,000 flights against Dnata’s 40,000.
Publicly, Dnata has admitted that SATS aggressive pricing tactics have impacted Dnata’s profit.
SATS has been investing in automation solutions and have led to an increase in revenue. A higher cargo yield will also mean that pricing on cargo handled could see similar growth.
That will not only impact the local operations of SATS but also have a positive effect on its associates.
How much is SATS worth?
Year to date (YTD), the decline of SATS is at about 4.6%. However, this may be a correction for the stock before it hits higher.
In the near term, investors can look forward to its commencement of services to AirAsia and Jetstar Asia.
Moreover, the increasing automation in SATS will decrease its overhead and increase the profitability of the company.
Analysts from UOB Kay Hian Research remains bullish on SATS Limited (SGX: S58) and gave it a “Buy” call with a target price of $5.40.
Even if the stock price’s trajectory were to not go as well as planned, SATS will offer investors a dividend yield of about 3.5%.