Good morning,
SATS SP (Update) - Positives priced in. Downgrade to HOLD.
- SATS has outperformed the FSSTI by 37% since our upgrade in May. PE valuations are now at historical highs of 19.8 - close to +2SD, while dividend yields are at a 2-year low. At current levels, we are mindful of downside risks, particularly from weak cargo throughput at Changi and Hong Kong, given falling regional exports and weak PMI.
- We also note that SATS' depreciation relative to PPE has been rising steadily, particularly for ground services equipment for gateway services. This suggests the need for higher replacement capex and thus potentially lower FCF going forward.
- We thus downgrade SATS to HOLD. We have lowered our FY17 net profit by S$5.0m, after assuming slower cargo and unit services growth. We trim our target price to S$3.90 from S$4.00. We prefer ST Engineering (STE SP/BUY/Target: S$3.50), which is now our preferred pick in aviation support services. STE offers a dividend yield of 4.9% vs 3.9% for SATS.
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