SATS Ltd: Looking for more overseas investments
1QFY16 results broadly in-line
Expects stronger overseas growth
Revise valuation method to DDM
1QFY16 results largely within expectations
- SATS Ltd’s (SATS) 1QFY16 results were broadly in-line with our expectations as core PATMI grew 8.5% YoY to S$47.1m.
- Despite a 4.2% YoY decline in its 1QFY16 revenue to S$416.9m, core PATMI was higher mainly due to a 5.7% drop in operating expenses to S$372.9m and a 23.1% jump in contribution from overseas associates and Joint Ventures (JVs) to S$12.8m. SATS’ strategy in driving productivity continues to bear fruit as 1QFY16 saw reduction across all expense categories except for depreciation and amortisation.
- The lower revenue was mainly due to an 8.2% drop in Food Solutions (FS) business but partially offset by a 2.0% increase in Gateway Services (GS) business.
Stronger indications of improved outlook
- Going forward over the longer-term, we believe SATS will see steady growth on several reasons:
- management’s commitment to drive productivity and invest in automation is likely to lead to sustainable reduction in staff costs and increase in operating leverage,
- airport rebates of up to 20% to help alleviate some cost pressures but not as significant as staff costs,
- growth in its cargo business that commands higher margins (e.g. cold chain facility),
- overseas associates and JVs expected to grow in both FS and GS segments (e.g. recently increased equity stake in Philippines food catering partner),
- re-acquired Jetstar Group as its client for GS segment (up to 40 flights/day) will see partial impact from 2QFY16 onwards,
- SATS’ Japanese subsidiary, TFK, is expected to see higher contribution with the recent contract win to support Delta’s flight operations in Tokyo, and lastly,
- management hinted on a strong pipeline of overseas investments through partnerships and JVs, which in our view, will drive SATS growth ahead.
Revision to valuation methodology; maintain HOLD
- We raise our FY17F PATMI forecast by 7.6% on stronger growth outlook.
- We expect it to maintain a dividend pay-out ratio of ~80% going forward and revise our valuation methodology to DDM-based (prev: 16.5x FY16F P/E) to better reflect SATS’ value over the longer-term.
- Consequently, our FV increases from S$3.22 to S$3.78 (2% terminal growth; 7.2% WACC).
- Maintain HOLD, supported by FY16F dividend yield of 4.1%.
(Eugene Chua)
Source: http://www.ocbcresearch.com/
