SATS struggles for growth amid weak industry outlook

The weak yen is another cause for concern.

An industry-wide slowdown will keep SATS’ growth muted within the next two financial years, as the mainboard-listed ground-handling and in-flight catering service provider continues to face headwinds from dropping ASEAN tourist arrivals and ongoing spending cuts by many carriers.

According to OSK DMG, SATS’ operations will also be impacted by the Japanese Yen’s weakness, as it may lead to translation losses for SATS’ Japan revenue.

“We expect elevated manpower costs amid weak revenue growth to remain a key drag on margins over the medium term. SATS is trading at 1SD above its historical 1-year forward P/E and EV/EBITDA multiples. While the valuation seems expensive amid weak earnings growth outlook, we believe its strong net cash position and its ability to continue paying dividends, which translate into a reasonable dividend yield of 4.4% over FY16-17, should provide support to the share price,” noted OSK DMG.

Here's more from OSK DMG:

Industry slowdown may keep growth muted. SATS is witnessing a drop in flights handled amid capacity rationalisation by airlines, while the growth in the number of passengers handled remains subdued due to weak tourist arrivals.

Although improving cargo volume offers some respite, we believe a drop in flights handled and negligible growth in passengers handled may result in muted revenue growth. We estimate FY16/FY17 revenue to grow 2.5%/3.0%, aided by a modest recovery in business.

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