SATS - UOB Kay Hian 2017-05-17: 4QFY17 Results Preview ~ EI Gains To Boost Earnings

SATS (SATS SP) - UOB Kay Hian 2017-05-17: 4QFY17 Results Preview: EI Gains To Boost Earnings SATS LTD. S58.SI

SATS (SATS SP) - 4QFY17 Results Preview: EI Gains To Boost Earnings

  • SATS is expected to beat street estimates when it reports 4QFY17 earnings on 19 May. 
  • We estimate a 25% yoy increase in headline net profit due to gains from the partial disposal of SATS HK and AAT. We also estimate a final dividend of 13.2 S cents (consensus: 10.7 S cents) as we assumed all the divestment gains will be paid out. 
  • Going forward, earnings growth will be dependent on Changi’s flight growth and SATS’ ability to generate returns on its investments in JVs and associates. 
  • Our HOLD call and target price are under review pending 4QFY17 results.



WHAT’S NEW

  • We preview SATS’ 4QFY17 results as follows.

Headline numbers expected to beat street estimates. 

  • We expect SATS to report a 25% rise in 4QFY17 net profit vs the street’s implied estimate of 4.3% growth. 
  • We believe that the street might not have factored in an estimated S$12m gains from the disposal of a 4% stake in AAT and a 51% stake sale in SATS HK, both of which were announced in 4Q. Excluding that, our estimate of 5% growth in core net profit is in line with consensus estimate. 
  • We also estimate 13.2 S cents in final dividend, assuming all divestment gains from sale of SATS HK and AAT will be distributed to shareholders.
  • Food solutions segment is still expected to be the main earnings driver in 4Q despite expectations of weak revenue growth, due to higher margins for the segment vs gateway services. 
  • We also expect lower operating leverage for gateway services due to weaker growth in flights and cargo handled at Changi. 
  • We have assumed a 1.6% increase in staff costs in 4QFY17 vs 1.2% in 3QFY17. Barring a sharp rise in staff costs, we expect a 6% rise in operating profit and a 5% rise in 4Q core net profit.


STOCK IMPACT

  • We highlight some of the key data points that we will be looking out for in the coming results and questions that we plan to field to SATS management.

a) Progress on JV with Wilmar. 

  • Management had previously guided that the first kitchen under the Wilmar-JV was due to commence operations at end-FY17, with a US$30m capex per kitchen facility. 
  • We intend to seek guidance on the progress of the JV and expected breakeven period as well as the hurdle rate for the project.

b) Extent of improvement in gateway services margins. 

  • In FY16, gateway margins improved 0.8ppt yoy to 6.5%, which led to a 19% rise in gateway operating profits.
  • SATS only discloses the numbers on annual basis and an improvement in operating margins would imply better labour productivity or capital efficiency. 
  • We would also query SATS on the impact of the recent approval for meat transshipment from New Zealand to Europe via its Singapore’s hub.

c) Extent of growth at local in-flight catering. 

  • Local in-flight catering revenue was flat in 3QFY17 (+0.2% yoy), despite a 4.8% rise in Changi pax throughput, suggesting pricing pressures. Given 4Q’s similar rate of throughput growth (+4.7% yoy), greater improvement in 4Q local in-flight revenue would imply: 
    1. greater volume of higher value-add meals, or 
    2. improvement in pricing. 
  • In addition, SIA’s loads to Europe have risen for three consecutive months. 
  • Given SIA’s improving long-haul loads, we would also query management if SATS is also seeing a pick-up in premium meal volumes.

d) Status of Changi Airport rebates. 

  • Since May 15, SATS had enjoyed 20% rebates on catering and ground handling fees out of Changi Airport, which resulted in lower licensing fees. The rebates were slated to end on 31 Mar 17, and we would query management if Changi would extend these rebates. A complete removal of the rebates should lead to about S$11m-13m in higher costs.

e) Profitability of SATS HK. 

  • On 17 Mar 17, SATS divested a 51% stake in its subsidiary SATS HK, which provides ramp and pax handling services at Hong Kong International Airport (HKIA), following which the unit was deconsolidated. 
  • We would seek clarification on the unit’s historical revenue contribution and operating margins.


EARNINGS REVISION/RISK

  • We raise our FY17 net profit estimate by 4% as we factor in disposal gains.


VALUATION/RECOMMENDATION

  • Our HOLD recommendation and target price of S$4.60 are under review, pending 4QFY17 results. 
  • Stock price has risen 7% ytd and SATS is trading at 2SD above mean PE. However, earnings growth over the next two years will be highly dependent on growth out of Changi Airport and SATS’ ability to generate higher returns on its investments in associates and JVs.


SHARE PRICE CATALYST

  • Higher flights and pax throughput growth, stronger associate and JV profits.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-17
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 4.600 Same 4.600



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