Here Are 3 Reasons Why This Brokerage Thinks SATS Ltd Can Grow

SATS Ltd (SGX: S58) is one of the latest additions to Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI). It joined the list on September 2015.

SATS has two main business segments: Food Solutions and Gateway Services. The first covers airline catering, food distribution, and industrial catering services. Meanwhile, the second sees SATS provide ground handling services of passengers, flights, and cargo.

Brokerage firm Daiwa Capital Markets had recently issued a report on SATS that contained three reasons why the former thinks the latter is poised to grow. Let’s take a look at them:

1. Changi Airport is growing

Singapore’s Changi Airport, one of the best airports in the world, is in the midst of developing Terminal 4. Changi Airport can handle up to 66 million passengers per year currently and its capacity is set to increase to 85 million by 2018 when Terminal 4 is ready.

Daiwa thinks that Changi Aiport’s expanded capacity – which brings about higher passenger traffic and demand for passenger meals – will benefit SATS.

The brokerage expects SATS’s revenue to grow at a compound annual rate of between 5% and 6% over the company’s next three fiscal years. Daiwa also pegged SATS’s profit to grow at a higher annual rate of between 9% and 11% over the same period.

2. Business deals could spur growth for SATS

SATS has been busy forming partnerships and joint ventures in recent times as my colleague Chin Hui Leong has pointed out. Some of the deals involve entry into new markets, such as SATS’s purchase of a 49% stake in Malaysia’s Brahim’s Airline Catering. Prior to this, SATS has never managed to enter Malaysia’s flight catering market.

Daiwa thinks that the various deals SATS had been involved in can drive growth for the company in the form of higher earnings and dividends from associates and joint ventures. For instance, Daiwa expects earnings from SATS’s associates and joint ventures to increase from S$48 million in the fiscal year ended 31 March 2016 (FY2016) to S$65 million by FY2019.

3. Growth in non-aviation businesses added to the mix

SATS is plugged heavily into the airline industry. But, Daiwa pointed out that SATS does have non-aviation related businesses, such as food processing and cruise management.

Daiwa thinks that the food processing industry in Asia can grow given the region’s rising population, affluence, and rate of urbanisation. As for the cruise management business, Daiwa thinks that it could also benefit from Asia’s growing affluence.

At SATS’s current share price of S$4.35, it has a trailing price-to-earnings ratio of 22. For perspective, the market in Singapore has a PE of around 12.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.