We believe fears that SATS will be disadvantaged once Singapore Airlines is no longer a shareholder are misplaced. Instead, we argue that SATS is now in a stronger bargaining position as (1) commercial terms between SIA and SATS will better reflect the latter’s dominant position at Changi Airport and (2) now that SATS has weaned itself off SIA and has a non-aviation business to fall back on.

Recently, SATS renewed its ground handling & inflight catering contract with SIA for 3+2 years, and its cargo handling contract for 5 years. In our opinion, the terms are more in SATS’ favour and will have a positive impact on future margins, as certain costs that were previously absorbed by SATS will now be passed back to SIA and SATS will share cost savings with SIA only after it achieves its cost-reduction objectives.

In addition, SATS is building a even bigger lead in its already entrenched position at Changi Airport through its plan to offer a secure, on-airport cold chain facility for perishable cargo and temperature-sensitive products that will be a first in Singapore and the entire region. Despite the decline in cargo volumes, perishable cargo was the one segment that held up and has better growth potential going forward.

To paraphrase Shakespeare, all the world is now SATS’ stage, and over the next few years, we believe the combined SATS/SFI will have many exciting opportunities that the two companies never had before as separate entities. For starters, the Singapore IRs are not the only game in town. Investors should think on a bigger stage. We are confident there will be other markets that SATS can penetrate.

SIA will complete its in-specie distribution of SATS shares to shareholders on 1 Sep. While some shareholders will surely sell due to the handsome gains in the past few months, we believe any weakness in SATS’ share price will be an opportunity to buy the stock. Our FY11-12 forecasts are still conservative. We reiterate our BUY recommendation and roll forward our target price to 16x FY Mar 2011, raising it to $2.81.