Passenger traffic growth is likely to drive volume growth for Gateway Services revenue. However, we do not expect a significant pickup in cargo volumes in the near term. Due to the strong operating leverage of cargo revenue, the bottom line for SATS would be affected in the near term.
However, we expect volume growth to offset cargo revenue as SATS pursue growth opportunities in China via acquisitions and joint ventures. Investments in the central kitchen would improve SATS’ non-aviation food services revenue by fulfilling demand for fast-casual restaurant chains in key cities. Acquisitions in NWA and joint ventures at Daxing International Airport will expand SATS presence in China.
The focus on digitalisation of its supply chain via COSYS+ and the partnership between SATS and DHL will improve efficiency and productivity to cope with pricing pressures for food.
Maintain ACCUMULATE; Lower target price of $5.36
We like the stock for its regional expansion story and growth initiatives. The strong cash flow generation will help sustain the 3.4% dividend yield. We maintained ACCUMULATE with a lower target price of $5.36 due to slower cargo business. Our target price gives an implied FY19e forward P/E multiple of 23.3 times.