SATS Ltd - Currency swings
- 3QFY3/17 net profit of S$65m (+5% qoq, 6% yoy) and 9MFY17 core net profit of S$187m (79% of our FY17F) were in line with our forecasts and consensus.
- Cargo saved the day in Singapore and associates in the region, in line with SIA Cargo, due to the bankruptcy of Hanjin that uplifted airfreight volume regionally.
- TFK’s revenue was down qoq due to weaker Yen but it was profitable.
- Operating margin improved to 15.1% (1H17: 13.7%) from lower raw material costs, which got some reprieve from regional currency movements.
- Maintain Hold with a higher TP, based on blended DCF (WACC: 7.6%) and 19x CY19F P/E.
Cargo and Changi airport boost Gateway
- Revenue for Gateway rose 8% yoy and 5% qoq to S$193m as a result of the supply chain effect from the bankruptcy of Hanjin Shipping in CY4Q16. This is likely to wear off in 4QFY17 due to the absence of stock building for Lunar New Year and Christmas, in our view.
- The number of passengers and flights handled at Changi reached a peak of 5.67m and 30,766 in Dec 16, respectively, contributing to Gateway’s growth.
Food solutions affected by weaker Yen and event timing
- Food solutions’ revenue was muted at S$246m (-2% qoq, +2% yoy) due to a slightly weaker Yen that caused a 12% drop in TFK’s revenue to SS$63m. The qoq dip was also due to the timing of a major non-aviation event that was held in 2QFY17 instead of 3QFY17 (it took place in 3QFY16).
- We believe revenue from aviation meals in Singapore could have remained flat yoy, with constant pressure on ASP.
Currency improves margin slightly
- Operating margin was 15.1% in 3Q17 and 14.2% in 9M17 (1H17:13.7%). Lower raw material costs (-8% yoy, -5% qoq), which accounted for 14.9% of revenue, had some reprieve from the weaker Yen, ASEAN currencies (ingredients sourced regionally) and Real (poultry sourced from Brazil).
- Staff costs (48.8% of revenue) grew 2% yoy and 1% qoq on higher wages, though the headcount was stable.
- We tweak our operating margin to c.14% for FY17-19 (from avg. of 13.6%) to reflect better control on costs.
Additional S$3m operating cost when Terminal 4 opens
- Management is neutral on the revenue uplift from the opening of Terminal 4 in 2H17 as it mainly involves the transfer of Cathay Pacific and AirAsia from Terminal 1. However, we do not rule out the possibility of these airlines increasing their frequencies after the transfer is complete. SATS is expecting an increase of S$3m in operating costs p.a. with minimal capex.
Overseas associates grew faster than Singapore
- Contribution from associates rose 10% qoq and 9% qoq to S$12.7m, with S$18.7m dividend received.
- Gateway’s associates’ earnings grew 29% qoq and 10% yoy as the regional volume for airfreight increased, in line with Singapore. Food solutions associates’ contribution was weaker (-45% qoq, +7% yoy), likely due to lacklustre tourist arrivals in Maldives as the US$ strengthened.
Maintain Hold and slightly higher TP
- We raise our FY17-18 EPS by 2-5% on higher margins. Our TP inched up (to S$5.00) accordingly.
- The current valuation of 21x forward P/E (+2 s.d. of its 10-year mean) is fair, tracking c.6-7% earnings growth in FY18-19.
- Re-rating catalysts could come from earnings accretive M&As and stronger Changi volumes. SATS is a beneficiary of Singapore’s aim to become an aviation hub.
- A sudden collapse in air traffic is a key risk.