3Q extended the downward trend that started in 1Q09, with net profit fallen by 25% yoy (-11% qoq after adjusting for a $10m investment write-off in 2Q). Catering revenue fell 11% yoy while ground handling fell 8% qoq as meal volume fell 1.5% yoy, passenger volume fell 2% while cargo & mail dropped 13%. In addition, share of associates’ profits plunged 57% yoy due to poor demand in China and India.

While topline growth was weak (despite the consolidation of Country Foods Macau and Menzies HK in 3Q), SATS has tightly controlled costs (+0.8% yoy). Raw materials and accommodation & utility costs rose (due to CF Macau and T3 operation) but staff costs fell 3% while depreciation fell 4%. As a result, operating margin (17.9%) has been stable for the last two quarters and is, in fact, higher than at the beginning of the year.

With the acquisition of Temasek’s stake in SFI, we are raising FY09 forecast by 7% as SATS will consolidate at least 70% of SFI in 4Q. The magnitude will depend on how much of the remaining shares SATS gets before the end of the financial year. We reckon it should be able to fully consolidate SFI by the next financial year. The offer document will be sent out next week, with completion targeted for end-4Q09.

Other than SFI, other catalysts include the withdrawal of Swissport, the third ground handler, from the local market. According to management, it is in discussion with all of Swissport’s clients to take over their needs from 1 Apr onward. Given SATS’ scale and dominance, we believe it is likely to get the lion’s share. Thai Airways in particular should be a prized catch.

We believe our investment basis is intact and therefore, maintain our Buy call. The stock trades at trough FY09 valuations of 8x excluding cash of $0.47 a share (before SFI acquisition). Catalysts include the opportunities brought to the table by SFI’s acquisition and Swissport’s withdrawal.