RHB Research 2015-07-24: SATS Ltd - Trading At Stretched Valuations. Retain NEUTRAL.

Trading At Stretched Valuations

  • 1QFY16’s SGD47m profit (+8.6% YoY) made up 23% of our/consensus FY16 estimates with profit growth aided largely by lower costs across all key expense categories as revenue remained weak (-4.2% YoY). 
  • We lift our FY16F-17F profit by 1.7-4.3% as we expect margin expansion to continue and retain NEUTRAL with a higher SGD3.35 TP (9% downside), following the 21% YTD share price surge, which we believe has factored in most of the upside from recent positive news flow. 

 Revenue growth continues to remain weak. 

  • In 1QFY16 (Jun), revenue fell 4.2% to SGD416.9m, mainly weighed by an 8.2% YoY revenue decline in the food solutions segment. 
  • Weak results from the Japanese subsidiary TFK Corp, a weaker JPY, the divestment of Australian subsidiary Urangan Fisheries Pty Ltd in Jul 2014 and the transfer of the food distribution business to SATS BRF Food Pte Ltd, the new joint-venture (JV) company in June, resulted in a 6.1% YoY revenue decline in SATS’ food solutions division. 
  • A 2% YoY revenue increase from the gateway services segment was largely aided by higher price points charged by SATS on full-service carriers. 

 Strong cost control to boost margins. 

  • SATS managed to record YoY and QoQ improvement in its 1QFY16 operating margin, buoyed by cost reduction across all expense categories except depreciation. 
  • The company reduced its staff headcount by 550, which helped reduce staff costs (its single largest cost component) by SGD3.8m in the quarter. 
  • The ongoing implementation of technology and various measures to improve productivity should enable SATS to sustain cost pressures and gradually push operating margins higher. 
  • Accordingly, we have increased our FY16-17 profit estimates by 1.7-4.3%. 

 Valuations look stretched; retain NEUTRAL with a higher SGD3.35 TP. 

  • SATS’ share price has surged 21% YTD on the news of: 
    1. rebates being offered by Changi Airport Group for ground handling and catering fees, 
    2. an increase in total DPS in 2015, 
    3. reacquisition of Jetstar’s account in Singapore (which it had lost to ASIG Ltd last year), and 
    4. potential improvement in TFK Corp’s operations aided by a SGD325m long-term contract win from Delta Airlines in Japan. 
  • We increase our TP to SGD3.35 (from SGD3.20) and maintain our NEUTRAL call, as the stock is now trading above +1SD forward P/E and EV/EBITDA multiples. 

(Shekhar Jaiswal)

Source: http://www.rhbgroup.com/