SATS LTD.
S58.SI
SATS Ltd - Stretching The Limit
- SATS will release its 4QFY3/17 results on 19 May. We expect SATS to report 4QFY17 net profit of S$60m-63m and final DPS of S$0.11.
- To sustain its 23x FY18 P/E valuation or +2.5 s.d. of 5-year mean, SATS needs to achieve at least 10% EPS growth in FY18F, which we believe may be a stretch.
- Our target price is raised to S$5.17, still based on blended valuations of DCF and P/E (19x), to incorporate our EPS tweak from lower cost assumptions.
Changi passengers and flights steady, cargo high in Mar 17
- SATS may deliver steady 4QFY17 revenue of S$440m-450m and net profit of S$60m- 63m.
- Revenue could be supported by strength in gateway as cargo tonnage was higher yoy as trade volumes rose in East Asia, Europe and the Americas.
- Cargo handled in Changi grew 6.2% yoy, boosted by +10% yoy in Mar. SATS’s ground handling business is still firm as flights and passengers handled in Changi airport grew 1.9% and 4.6% yoy in 1QCY17. Better cargo could lift EBIT margin as it is less labour intensive.
TFK should remain strong with stronger Yen
- Yen strengthened against S$ by c.4% qoq. This could lead to a stronger translation of Japan’s revenue.
- Overall tourist arrivals into Japan grew by 7.7% qoq in 1QCY17. This should see firm volumes for TFK’s operations, assuming SATS does not lose any market share (c.40-50%).
It is crucial for associates to keep up their momentum
- We expect 4QFY17 associates earnings of S$14m (+14% qoq, 24% yoy) if ASEAN’s 9MFY17 airfreight momentum is maintained.
- Hong Kong cargo landscape may still be competitive. Maldives should be firm with the return of more European tourists.
- Overseas associates’ growth is key to SATS’s growth given the limited single-digit growth that can be achieved in Singapore.
Driving down cost was the key re-rating factor in past two years
- SATS has re-rated in the last two years, due to its inclusion in the FSSTI and double-digit earnings growth, in our view.
- In FY16, the deconsolidation of food distribution business and licensing fee rebate led to 13% yoy earnings growth, although its revenue fell 3%. 9M17’s 13% yoy earnings growth was due to higher sales from Delta’s contract in Japan, cargo strength and some raw material cost savings mainly on weaker currencies (Yen, Real).
- EBIT margin grew from 12.6% in FY16 to 14.2% in 9MFY17.
Hard to keep up the double-digit earnings growth beyond FY17
- For FY18-19F, we are factoring in c.6% p.a. revenue growth on sustainable Changi volume increase.
- We lower assumptions for raw materials, company accommodation & utilities and others, assuming SATS is able to keep up with its efforts to control costs and benefit from favourable currency effects.
- Our EBIT margins for FY18-19F are lifted to 14.4% and 14.6%, respectively (prev. 13.7% and 14.4%).
- Our EPS is tweaked higher by 2-4% for FY18-19F. Even after these, our projected earnings growth is only 7-8%.
Trading at +2.5 s.d. of 5-year mean
- The stock is trading at stretched valuations of 23x FY18 P/E, leaving little room for disappointment. Recent share price strength could be due to rotation into YTD index laggard as SATS had underperformed the FSSTI.
- We see opportunity to trim some profits post results and dividend announcement.
- Re-rating catalysts could come from stronger-than-expected cost cutting measures or sizeable M&As.
- Key risk is a general slowdown in air traffic within Asia.
- Maintain Hold.
LIM Siew Khee
CIMB Research
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http://research.itradecimb.com/
2017-05-17
CIMB Research
SGX Stock
Analyst Report
5.17
Up
5.000
