With the SFI acquisition completed, the shape of things to come is becoming clearer for SATS, and it is exciting! One alluring aspect is the fact that SATS is on the verge of becoming an Integrated Resort play, with the future opportunity to supply meals to the Marina Bay and Sentosa casinos. Also, it can potentially unlock $0.20/share in value from properties that are still held at book value.

Each IR is expected to hire 10,000 staff each, and every one of them has to be fed at least two meals a day. It is a once-in-a-lifetime opportunity; we estimate the IRs could demand 22m mealsa year (assuming 3 meals a day) or 85% of the number of inflight meals SATS supplied to airlines in FY2008. SATS has a very high chance of winning, given its ability to cater premium food and now that it has SFI’s mass production platform.

Management is now moving to manage its key accounts globally as part of its efforts to be its airline customers’ global catering partner whereever they fly to. It will start with the UK, where it can use SFI’s food operations (e.g. Daniels’, ICL), and it aims to replicate this in important aviation hubs in the region, such as HK. The upside could be substantial, as SATS already caters to 48 of the 68 carriers that use Changi as a hub.

SATS has in its balance sheet $460.8m of properties that are held at historical cost (the two inflight catering centres and six airfreight terminals that it uses to prepare airline meals and handle freight). If SATS opts to sell and lease back the buildings, we estimate a revaluation to market prices will result in at least $215m ($0.20/share) of surplus that could be returned to shareholders if it has no other need for the funds.

We upgrade our target price to $2.51, based on 16x FY10F earnings. We have pegged a higher P/E in view of the potential earnings boost from IR-related contract wins. Our FY10-12 forecasts currently do not factor in these contract wins. Other catalysts include the greater stock liquidity once SIA completes its distribution of SATS shares and the potential return of excess capital realised from sale of properties.