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Brokers' take: OCBC downgrades SATS to 'hold' after stock's run-up

OCBC Investment Research has downgraded SATS to "hold" from "buy", citing the stock's recent climb and uncertainty about potential pricing pressure.

But OCBC analysts Eugene Chua and Low Pei Han also raised their fair-value for the stock to S$5.50 on the back of a positive longer-term outlook for the ground-handling and in-flight catering services company.

"However, SATS' share price has appreciated about 25.0 per cent since we upgraded the stock to "buy" on Oct 2, 2017," the analysts wrote.

"All considered, while we remain positive over its longer-term outlook, we believe investors should position themselves to accumulate at better entry levels, closer to S$5.05 and lower."

Shares of SATS traded at S$5.71 as at 9.56am on Tuesday, down 1.2 per cent or 7 Singapore cents on the day.

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SATS has entered into a number of overseas partnerships that will help the company to diversify outside of its traditional base in Singapore, the analysts said. Its pact with AirAsia will open doors in Indonesia, the Philippines and Thailand, while its deal with Wilmar establishes a foothold in China. A potential agreement with Turkish Airlines offers access to Istanbul New Airport.

"Over the longer-term, we remain positive over SATS' outlook driven by its strategy to diversify out of Singapore as well as into non-aviation business segments," the analysts wrote.

The short-term trend at Changi Airport, where OCBC estimates SATS handles close to 80 per cent of traffic throughput, is also supportive. Passenger throughput at Changi rose 8.1 per cent in November 2017, while ircraft movements increased 4.8 per cent and air freight movements grew 10.7 per cent.

The opening of Changi's fourth terminal in October 2017 also suggests room for longer-term traffic growth at the airport.

But whether the higher volumes necessarily lead to better business for SATS may hinge on how well the airlines do.

"It remains unclear whether the pressure on yields faced by airlines will be translated to pricing pressure for SATS," OCBC wrote.

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