DBS Group Research 2015-07-24: SATS Ltd - Reaping productivity gains. Maintain HOLD.

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Reaping productivity gains 

• 1Q16 marginally ahead on lower costs, associates contribution. 
• Focus on productivity continues to reap rewards. 
• Raise FY16/17F earnings by 5%/9% on the back of lower cost assumptions. 
• TP raised to S$3.43 but maintain HOLD; stock offers 4.1% yield. 

1Q16 slightly ahead on lower costs, associates contribution. 

• SATS’ 1Q16 (FYE Mar) core net profit of S$47.1m (+8.5% y-o-y) was marginally ahead of our expectations. 
• While revenue dipped 4% y-o-y to S$416.9m, the stronger bottomline performance came from lower operating costs which declined 6% to S$372.9m and higher contribution from associates/ JV (+23%). 
• The fall in revenue was from Food Solutions which in turn was due to TKF Corporation, divestment of a subsidiary and transfer of its food distribution to a newly formed JV. 

Focus on cost control measures paying off; benefitting from lower utilities, licensing fees. 

• The key surprise came from its ability to manage costs; all expense items dropped except for depreciation and amortization. 
• In particular, cost of raw materials declined by S$9.4m (-11% y-o-y) on the back of management’s efforts to consolidate its supply chain and hence derive savings. 
• Going forward, management expects this trend to remain sustainable. 
• Staff costs dipped by 2% (-S$3.8m) to S$200.1m given lower headcount of 14,000, a reduction of 550 from a year ago. 
• The lower cost also came from energy and utilities, coupled with licensing fee rebates from Changi Airport Group. 

Raised FY16/17F by 5%/9%; TP raised to S$3.43, maintain HOLD. 

• We raised our FY16F/17F earnings by 5%/9% on lower cost assumptions as we believe management efforts to control costs should be sustainable. 
• Along with this, our DCF/ PE backed TP is raised to S$3.43. 
• The counter is trading at 19.1x FY16F PE, which is +1.5 SD above its 5-year historical average. 
• We believe this has largely priced in the positives. That said, prospective dividend yield looks attractive at 4.1%. 
• Maintain HOLD. 

(Alfie YEO; Andy SIM, CFA)

Source: http://www.dbsvickers.com/