Phillip Securities Research 2015-07-24: SATS Ltd - Margins improvement with cost control measures. Upgrade to NEUTRAL.

Margins improvement with cost control measures. 

  • S$416.9 million revenue missed consensus estimate of S$439.3 million by 5.1%. 
  • S$47.1 million adjusted PATMI missed consensus estimate of S$50.5 million by 6.7%. 
  • Upgrade to "Neutral" rating with higher target price of S$3.36 on expectations of a stronger 2HFY16, but cautious over the recent price rally. 

What is the news? 

  • SATS Ltd ("SATS") announced its 1Q FY16 (Y/E Mar) results on 23 July after trading hours, followed by the Analyst & Media Briefing teleconference. 

Analyst Briefing Key Takeaways 

  • S$16 million of the S$21 million decline in Food Solutions revenue was due to: Unfavourable movement in JPY affecting TFK revenue, divestment of Urangan Fisheries in July 2014, and loss of revenue associated with the transfer of the food distribution business to the new JV, SATS BRF Food Pte Ltd. 
  • SATS has regained the Jetstar account, fully taken over on 22 July. Ground handling of Jetstar flights had been progressively transferred from ASIG back to SATS over the last month. 
  • Full 20% CAG rebates will not flow through to the ground handler. Details are still being worked out, but it was suggested that the Licence fees in this quarter would be representative of what to look out for going forward. 
  • Lower cost of raw materials is sustainable. This was achieved through supply chain management within the group and scale in purchasing for both the aviation and non- aviation segments. Some savings have already been passed on to customers, making prices competitive. 

What we think 

  • No surprises in 1Q results. Revenue of S$416.9 million and underlying PATMI of S$47.1 million each comprised 23.4% of our full year estimates. (1Q and 4Q have historically been weaker compared to 2Q and 3Q.) 
  • We expect to see a stronger 2HFY16, on the back of revenue growth as the Jetstar account at Changi (July) and the Delta Air Lines catering contract with TFK (October) kick in. 

Investment Actions 

  • Upgrade to "Neutral" rating on SATS, as we incorporate the positives to come in 2HFY16 into our model. New higher target price of $3.36 (Previous: S$2.97)

Source: http://www.poems.com.sg/