Turkish delight off the table but this shouldn't ruffle Sats' feathers

NO TURKEY on the table? No problem.

That seems to be the stance from a number of analysts in the wake of Sats' recent announcement that it has axed a memorandum of agreement (MOA) with Turkish Airlines that would have seen the aviation solutions firm providing in-flight catering to Turkey's flag carrier and other airlines at Istanbul New Airport.

Touted to be the world's largest, Istanbul New Airport - the city's third airport - is slated to open its doors in end October and can handle over 200 million passengers annually.

Reasons cited for the tie-up falling through include contractual obligations between Turkish Airlines and the incumbent caterer Do & Co, as well as other factors such as political instability and a weaker Turkish lira, analysts say.

But CGS-CIMB Research analyst Lim Siew Khee pointed that the termination of the MOA might actually be a blessing in disguise, given currency fluctuation and operational risks in shifting from Istanbul's existing international airport, Ataturk, to the new airport. She maintained a hold call on Sats, but trimmed her target price to S$5.06.

The termination of the MOA with Turkey's flag carrier will see "less of a strain on financial resources", which could lead to a higher dividend payout and free up resources to pursue other deals, reckons DBS analysts Alfie Yeo and Andy Sim. They estimate a 19 cent and 20 cent dividend payout for FY19 and FY20, respectively, higher than the 18 cents that Sats dished out to shareholders in FY18.

There are also other catalysts for the stock, namely, an improving outlook in Japan (where Sats has a catering unit) and the ramp-up of Changi Airport's Terminal 4. At the same time, passenger volumes are expected to grow across Asia, as airlines beef up their fleet and regional airports expand.

Meanwhile, UOB Kay Hian analyst K Ajith expects that a bigger growth driver for the caterer and ground-handler will be China, where it has a joint venture with Wilmar's subsidiary YiHai Kerry in the food business. The JV has made a profit about a year earlier than expected. "We believe there will be strong demand for safe and high quality food as consumers become more discerning," said Mr Ajith, who maintained a buy call on the stock with a target price of S$6.10.

Amid the heightened focus on safe and high quality food, Sats JV is now working on opening a central kitchen in Langfang, Heibei, although it could take up to three years before the venture is profitable for the group.

China aside, Sats also has other ongoing ventures or projects abroad, namely a ground-handling joint venture with AirAsia in Asean, and the development of greenfield cargo facilities in Dammam, Saudi Arabia.

Bright spot

Another bright spot is its cruise business in Singapore, which has turned around. In the first quarter of FY18/19, the Marina Bay Cruise Centre (MBCC) in Singapore benefited from more ship calls and a bump in the number of passengers handled.

Sats - which released its first quarter results recently - saw its net profit rise 11.5 per cent year on year to S$63.9 million, on the back of continued growth in aviation volumes, as well as higher revenues from Japan and MBCC. Revenue rose 3 per cent to S$439.4 million, thanks to higher contributions from both its food solutions and gateway services businesses.

Still, risks remain. The US-China trade war remains a threat to the cargo industry as it could weigh on cargo volumes, although Maybank Kim Eng analyst Neel Sinha noted that Sats' direct exposure to US-China trade is "quite small" and is confined mainly to its associate in Hong Kong.

As far as airlines are concerned, a competitive environment in Asia and rising jet fuel prices continue to put pressure on yields; for Sats, this means that prices and margins may remain under pressure.

But as long as its other avenues of growth remain on track, going cold turkey on its tie-up with Turkish Airlines shouldn't be a major drawback for Sats.