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Broker’s take: OCBC upgrades SATS to ‘buy’ on price correction, positive industry trends

OCBC has upgraded SATS to "buy" after the stock's recent share price correction, citing optimism about the airline services group's ability to ride the industry's buoyant outlook.

OCBC maintained its fair-value target for the stock at S$5.39. The counter changed hands at S$4.89 on Tuesday before the market's mid-day break.

Amid concerns about trade tensions between the US and China, along with weakness in the broader market, the share price of SATS has fallen about 7 per cent from its recent peak in end July compared to the Straits Times Index’s 6 per cent drop over the same period, the broker said.

But OCBC analyst Low Pei Han said that SATS has been turning to automation and technology to increase productivity and reduce reliance on manpower costs. For instance, a new production line announced in 2016 is expected to enable mechanisation of certain kitchen operations of up to 50 per cent, while a new e-Commerce AirHub at Changi Airport is expected to improve mail sorting capabilities. Those longer-term initiatives will put the company in position to capture positive industry trends, the analyst said.

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"Business leaders have to think longer term and continue implementing strategies that they have embarked on," the analyst wrote. "SATS is poised to benefit from growth in global air passenger cargo volumes along with increasing demand for travel and related services."

The group’s return on equity has increased to 16.2 per cent in FY2018 from 12.8 per cent in FY2014, and its dividend has also increased by S$0.01 per share each year to S$0.18 per share in FY2018 from S$0.13 per share in FY2013, the analyst said. At current prices, there is an estimated 3.85 per cent dividend yield along with growth prospects.