CLSA starts SATS at Underperform; targets $2.90

Stock Name: SATS
Company Name: SATS LTD.
Research House: CLSA

CLSA initiates SATS (S58.SG) at Underperform with a $2.90 target, tipping a more muted year for SATS following FY10’s “stellar” performance. “Topline growth is likely to slow on the back of normalization of aviation sector growth and the entry of a third ground handler, with rising raw material costs also negative for margins.” 

The house notes SATS’ LCC unit remains loss-making, and forward P/E of 14.7X appears rich. CLSA’s target implies 9.0% upside (vs 13% for the market). 

The house says although the 2009 acquisition of Singapore Food Industries has resulted in greater revenue diversification (40% of FY10 turnover was non-aviation related), earnings remain heavily geared to the aviation cycle; “we expect slower aviation growth in the next few years post FY10’s blistering recovery. Growth in Singapore visitor arrivals should moderate from 2010’s 20% to 6.0% in 2015.” 

The house also expects headwinds from rising food inflation, with every 5.0% increase in raw material costs eroding profit by 5.2%. 

Shares are off 0.8% at $2.63.