SATS (SATS SP) - Maybank Kim Eng 2017-02-10: Still an expensive voyage

SATS (SATS SP) - Maybank Kim Eng 2017-02-10: Still an expensive voyage SATS LTD. S58.SI

SATS (SATS SP) - Still an expensive voyage


Maintain SELL: good quarter, but momentum waning 

  • 3Q17 core PATMI of SGD65.1m was around 14% higher than our estimate and, we believe, beat consensus by c 6%. 
  • Revenues were actually softer than expected, but a sequential EBITDA margin growth of 60bps drove the lion’s share of the surprise. 
  • Management stated that the outlook for its airline-related business (c80% of revenue) remained very challenging and, going forward, similar quanta of margin uplift would be tough.
  • Valuation is lofty at over 2SD above its five-year P/E mean. 
  • Our TP of SGD3.76 is based on 17x FY18 EPS (five-year PE mean).


Cargo growth provided tailwind to gateway services 

  • 3Q17 gateway services revenue grew 2.2% YoY and associate profit a strong 9.9% YoY, mirroring the positive trends seen in cargo traffic both at Changi Airport and SIA’s (SIA SP, SGD9.70, HOLD) results. 
  • While SATS’ 3Q is traditionally a strong quarter for cargo volumes, management believes the Hanjin Shipping bankruptcy situation also provided a big boost to air cargo growth in the region. 
  • Given a high fixed cost structure of gateway services, it benefitted from operating leverage, as well as higher profit margins.


Food solutions hurt by event timing, currency 

  • 3Q17 food solutions revenue fell 1.8% YoY, while associate profit was up 6.7% QoQ, albeit from a small base. 
  • Two key factors were responsible for the soft revenues: 
    1. timing of a large non-aviation catering event, which fell in the earlier quarter; and 
    2. relative JPY/SGD currency weakness that eroded an otherwise good performance in its Tokyo operations.


Growing non-aviation business is a key focus 

  • Amongst the more significant initiatives is a tie-up with Wilmar for large scale kitchens in China (first one on track for operation mid-2017), a JV with DFASS for retail inflight and mail-order, and development of an old air freight terminal to serve the e-commerce cargo market. 
  • While these developments are positive, it may take a few years before we see any material profit contribution from these ventures.


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

  • Increased competitive intensity / pricing pressure given a challenging outlook for airlines.
  • 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 | Neel Sinha Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-10
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 3.760 Same 3.760



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