SATS' exit from Middle-East market only a temporary setback

Company still interested in expanding in region.

SATS announced its disposal of its 40% stake in Adel Abuljadayel Flight Catering Company joint venture, but OCBC Investment Research noted that management still intends to pursure attractive investment opportunities that will be more effective in penetrating the lucrative region.

Here's more from OCBC:

Disposal of Adel Abuljadayel JV. SATS announced that it will sell its 40% equity interest in its Adel Abuljadayel Flight Catering Company joint venture for a cash consideration of US$18.4m (~S$23.4m), which is slightly below the book value of the asset as of 31 Mar (S$24.1m). The stake will be purchased by the JV’s existing shareholder, Adel Abdulmajed S Abuljadayel, and the proposed sale will be subject to the fulfilment of certain conditions and the procurement of necessary regulatory approvals by the Saudi Arabian General Investment Authority.

Short-lived JV but view on Mid-East unchanged. Despite the short tenure of the JV – the 40% equity interest was only purchased back in Apr 2011 – the exit does not signal a change in management intent regarding the region. Management still intends to establish a foothold in the Middle East, and will continue to pursue other attractive investment opportunities. That said, the inherent difficulties in penetrating the region and sourcing for a suitable partner will mean that future opportunities will likely take the form of JVs.

Minimal impact on financials. The JV does not contribute significantly to SATS’s west Asia operations as the segment is largely dominated by its Indian subcontinent JVs so the impact to its financials will be minimal.

Outlook remains positive; maintain HOLD. With its earnings stability, positive prospects (Changi Airport passenger traffic grew 4.7% YoY for May) and healthy dividends, it is no surprise to see SATS’s share price remain fairly resilient even in the face of recent market volatility. Although valuations are still expensive in our view as many of the positives have already been priced in, we believe the counter will continue to hold up in the coming weeks ahead of its 1Q14 results. Maintain HOLD with an unchanged fair value of S$3.15.