SATS - Maybank Kim Eng 2016-11-11: 2Q Results Inline; Time to Take Profit

SATS (SATS SP) - Maybank Kim Eng 2016-11-11: 2Q Results Inline; Time to Take Profit SATS LTD S58.SI

SATS (SATS SP) - 2Q Results Inline; Time to Take Profit


Maintain SELL; Take profit on fully priced stock 

  • Net profit was in line, but the increase in interim DPS was a pleasant surprise. However, we believe the valuation is stretched at 21x FY16 P/E and advise investors to SELL
  • Our TP remains unchanged at SGD3.76, which is based on 17x FY18 EPS, about 0.5SD above its historical mean) to account for stable EPS growth profile. 
  • Significant margin improvement will be difficult from now, and given the need to reinvest in automation to replace labour costs, capex and depreciation will trend up. Therefore, we believe consensus forecast for an 180bps expansion in FY16-19 EBIT margin is too bullish. 
  • Lastly, the recent sale of 23m shares at SGD4.75 by Temasek, its major shareholder, will cap any upside to the stock.


2Q16 inline; Limited room for further margin upside 

  • 2Q16 net profit rose 4% YoY to SGD62.1m. 
  • Stripping out the one-off gain from the sale of an industrial property in 1Q, 1H17 core net profit of SGD117.6m was in line at 49.5% of our full-year forecast. 
  • The 3.7% YoY increase in revenue was driven by a stronger performance from TFK Corp (+33.6%), which benefitted from a stronger JPY (+17% vs SGD) and higher workload from Delta. 
  • Going forward, management cautions that pricing pressure could limit margin upside for TFK. 
  • Weaker gateway services operations led to a 3.4% YoY decline in contributions from its associates and JVs. AAT, its 49%-owned air cargo handling associate in Hong Kong, continues to face a challenging operating environment.


Increase in interim DPS a pleasant surprise 

  • The 1ct increase in its interim DPS to 6 cts was a pleasant surprise.
  • Management declined to comment on its full-year payout, but it reiterated its intention to keep a progressive and sustainable dividend distribution. Our full-year forecast of 16 cts translates to a 75% payout.


Fresh disclosure on operating statistics 

  • SATS provided fresh disclosure on its operating statistics, which included operating data for SATS and its subsidiaries (ex-JVs/associates).
  • Essentially, operating statistics for TFK Corp, SATS HK, Marina Bay Cruise Centre and its institutional catering business are now included. These offered an interesting perspective after stripping out its previous disclosure on statistics for Changi Airport only. The newly included units handled 1.6m passengers, 14.8k flights and produced 17k meals in 1H16.


Swing Factors


Upside

  • Higher than expected growth in air traffic.
  • Inorganic growth from acquisitions.
  • Higher dividend payout. Payout ratio had been capped at 80% despite large cash hoard. Upside to payout is possible to drive efficient use of capital.

Downside

  • Stagnant or contraction in air traffic.
  • Poor execution from new acquisitions. For example, earnings drag from its recently acquired 34% stake in Brahim’s inflight catering business.
  • Market expects margins and EPS to rise as the company drives scale across the group. Inability to contain cost increase could lead to disappointment.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-11
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 3.760 Same 3.760




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