1QFY16: Operating Margins Improve
- Despite Lower Top-Line While 1QFY16 net profit was within expectations, we are still impressed by SATS’s ability to manage costs even amid difficult operating environment.
- Going forward, SATS’s operating margin could improve further due to the resumption of the JetstarAsia contract.
- Maintain BUY. Target price: S$4.00.
RESULTS
• Good set of results and net profit in line with consensus’ S$50.5m estimate.
- Much of the weakness at the top-line was due to lower revenue from Japanese catering subsidiary TFK.
- Gateway services revenue improved despite a 4.2% yoy decline in unit services for the period.
- Management attributed this to better pricing on wider bodied aircraft, operating by full service carriers.
- Operating cash flow before working capital rose a commendable 9.5% yoy.
• Operating margin however improved yoy on lower staff costs (-1.9%), raw material costs (-11%) and licensing fees (-12%).
- The reduction in staff cost was due to productivity improvement. Headcount fell 3.8% qoq. At the non-operating level, there was a S$2.5m gain from the transfer of a business unit to SATS BRF Food, vs a loss on disposal in the previous quarter.
- Associate income also improved 23% yoy due to strong gateway services contribution.
STOCK IMPACT
• Yield on gateway services continued to improve.
- SATS continued to demonstrate pricing power with ASP rising 6.6% yoy. This offset the 4.2% yoy decline in volume.
- Going forward, we expect ASP growth to be maintained and have assumed lower yoy decline in volume.
• Resumption of JetstarAsia contract will be a further catalyst to continue owning the stock.
- SATS has regained the ground handling contract from ASIG in late-July and will provide scale for the gateway services operation. JetstarAsia has been aggressively adding capacity but rival Tigerair has been cutting capacity.
- JetstarAsia’s 40 weekly flights will add 1.6% to 1QFY16 flights handled although margins on narrow bodied aircraft are lower.
• TFK’s revenue should rise in 2HFY16 and losses could reverse.
- Management specifically indicated that TFK’s earnings should improve in 2HFY16 due to an earlier restructuring as well as maiden contribution from Delta Airlines.
- TFK had signed a multi-year S$325m contract with Delta Airlines, which will start to contribute from Sep 15.
EARNINGS REVISION/RISK
• No change to our earnings forecasts.
- However, there is some upside risk to our earnings as our current numbers imply 6.6% yoy net profit growth vs ytd 8.8% yoy growth.
VALUATION/RECOMMENDATION
• Maintain BUY.
- SATS has gained 20.7% ytd and 14.6% since we last upgraded the stock.
- It has clearly outperformed the FSSTI and we reckon could still outperform the benchmark (-0.3% ytd).
SHARE PRICE CATALYST
- Improved operating numbers.
- Higher-than-expected savings from licensing fees.
(K Ajith )
Source: http://research.uobkayhian.com/
