• Well-run local operations. We recently visited SATS’s Inflight Catering Centre 1 (SICC 1) and SATS’s wholly-owned subsidiary, Country Foods, where we observed the operations and were briefed on the various work processes, quality and safety checks involved. Overall, the operations appear well-run, with a clear focus on quality and safety.

• Limited synergies with SFI. While SATS expects cost synergies of S$12m-15.5m from its acquisition of SFI, we believe that the number might prove too optimistic given the different business models and customer bases, where synergies and streamlining opportunities may be limited. Failure to secure 100% of SFI would further limit synergies. Even assuming that cost synergies of S$12m-15.5m come through, the acquisition valuation still works out to an expensive 12.7-13.5x FY07 core P/E, vs. SFI’s peers and SATS.

• Maintaining FY09-11 EPS estimates. We have factored in SATS’s 70% acquisition of SFI and are keeping our EPS estimates unchanged.

• Maintain Underperform and target price of S$1.25. Given our concerns over the limited potential for synergies, we maintain that the acquisition would increase the company’s risk profile. Our sum-of-the parts target price remains S$1.25.