CIMB Research 2015-07-24: SATS Ltd - Waiting for volume growth. Maintain HOLD.

Waiting for volume growth 

  • At 22% of our FY3/16 forecast, SATS’s 1Q16 core net profit of S$47m (+7% yoy,-4% qoq) is in line with our expectations and consensus. 
  • Cost reduction initiatives are ongoing as overall operating expenses dropped 2% qoq to S$356m. 
  • EBIT margin inched up to 10.6% in 1Q16 from 10.5% in 4Q15. 
  • We keep our EBIT target of 10.9% as we expect higher volume growth in 2H16, driven by the Jetstar contribution in Singapore and Delta contract in TFK to lift the operating leverage. 
  • SATS reiterates that staff strength is sufficient to handle these new contracts. 
  • Maintain Hold given its decent dividend yield of 4%. However, its valuation is near its peak of 19x. We make no changes to our target price (S$3.54), still based on a blend of 17x CY16 P/E and DCF (WACC: 7.6%). 

All about cost control 

  • Revenue was down 2% qoq to account for the de-consolidation of SBRF and weaker TFK (lower volume and continuous deprecation of the yen). 
  • Operating costs were down by 2% qoq, mainly due to savings in raw materials (-10% qoq), thanks to better supply management. 
  • Raw materials accounted for 20% of total operating costs (previously 22%). The cost savings in raw materials are sustainable and expected to remain in the quarters ahead. 
  • Staff costs dropped 2% yoy, in line with the lower headcount by 550 to c.14,000 staff strength. 
  • Licensing fees and “other costs” also saw a c.10% reduction qoq. 
  • We are slightly disappointed that the absence of restructuring expenses in TFK (several millions in 4Q15) has not caused a stronger rebound in EBIT margin in 1Q16. 

2HFY16 to be better 

  • Jetstar has 100% returned to SATS from 22 Jul, which should contribute to higher volume in gateway in 2H16. 
  • No additional hiring will be required to take on the volume from Jetstar. Jetstar currently operates 40 flights/day, higher than its 33 flights/day previously before its switch from SATS to the third ground handler, Asig, in Oct 14. 
  • Delta Airlines’ long-term contract (S$325m) will also contribute to the topline growth for TFK in Sep 15. With these, we believe that SATS’s EBIT margin may expand and meet our target of 10.9%. 

Positives priced in 

  • SATS is trading near its peak of +1s.d. of its historical valuations, or 19x forward P/E. 
  • We believe that the positives of margin expansion and volume growth have been factored in.

(LIM Siew Khee)

Source: http://research.itradecimb.com/