SATS Ltd - Regional expansions on track
- 3Q S$440.9mn revenue missed our forecast of S$459.5mn by 4.0%.
- 3Q S$65.1mn PATMI missed our forecast of S$72.5mn by 10.2%.
- 9M S$1.304bn revenue met 74.3% of both consensus FY17 expectations of S$1.756bn, and our FY17 forecast of S$1.754bn.
- 9M S$182.7mn PATMI met 75.9% of consensus FY17 expectations of S$241mn, and met 72.8% of our FY17 forecast of S$250.9mn.
Aviation to remain under pressure, but building networks to enhance connectivity
- 87% of 9MFY17 revenue is derived from Aviation. Management opined that the environment for airlines will continue to be under pressure, making it difficult for SATS to raise prices.
- TFK Corp in Japan has been profitable since 1QFY17. 3QFY17 had some positive effect from the appreciation of JPY against SGD offsetting the lower volume and lower revenue in JPY terms.
- SATS has expanded its regional network through the recent acquisitions involving Brahim's Catering in Malaysia and MacroAsia Catering in the Philippines. SATS has also ventured to the adjacent continent of the Middle East through the acquisition and forming of a cargo handling JV in Muscat, Oman and the setting up of a new cargo handling JV in Dammam, Saudi Arabia. We view this positively as it sets the stage for SATS to further enhance connectivity within its network.
Diversifying to Non-Aviation: DFASS-SATS JV going well, SATS Yihai Kerry JV on track
- DFASS-SATS is profitable, expanding in Singapore and SATS is gaining experience in point of sale operations.
- Meanwhile, the first SATS/Wilmar JV facility just outside of Shanghai is ready to prepare food. It is now undergoing hygiene and customer audits and should be producing revenue meals by the end of FY17.
Reinvesting in capex to harness technology, improve productivity and drive growth
- Capex has been deployed for the conversion of SATS Airfreight Terminal 1 to handle ecommerce and airmail sortation for SingPost.
- Automation within the facility is able to handle four times the airmail than previous, but with less manpower. This is in line with SATS' long-term goal to improve productivity and keep headcount flat through investments in automation.
- Management clarified that SATS' capex contribution to Terminal 4 will only be about S$3mn to fit out the lounges; SATS will not be incurring the capex for check-in and baggage handling facilities.
Maintain "Neutral" rating, with higher target price of S$4.73 (previous: S$4.48)
- We see the investments in capex resulting in higher operating leverage and sustainable net margin in the mid-teens.
- Our target price gives an implied forward P/E multiple of 21.6x.