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:
- timing of a large non-aviation catering event, which fell in the earlier quarter; and
- 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.
- 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.
- 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.