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UOB Kay Hian Research 2015-07-24: SATS Limited - 1QFY16 Operating Margins Improve Despite Lower Top-Line. Maintain BUY.

1QFY16: Operating Margins Improve 


  • Despite Lower Top-Line While 1QFY16 net profit was within expectations, we are still impressed by SATS’s ability to manage costs even amid difficult operating environment. 
  • Going forward, SATS’s operating margin could improve further due to the resumption of the JetstarAsia contract. 
  • Maintain BUY. Target price: S$4.00. 


RESULTS 


• Good set of results and net profit in line with consensus’ S$50.5m estimate. 

  • Much of the weakness at the top-line was due to lower revenue from Japanese catering subsidiary TFK. 
  • Gateway services revenue improved despite a 4.2% yoy decline in unit services for the period. 
  • Management attributed this to better pricing on wider bodied aircraft, operating by full service carriers. 
  • Operating cash flow before working capital rose a commendable 9.5% yoy. 

• Operating margin however improved yoy on lower staff costs (-1.9%), raw material costs (-11%) and licensing fees (-12%). 

  • The reduction in staff cost was due to productivity improvement. Headcount fell 3.8% qoq. At the non-operating level, there was a S$2.5m gain from the transfer of a business unit to SATS BRF Food, vs a loss on disposal in the previous quarter. 
  • Associate income also improved 23% yoy due to strong gateway services contribution. 


STOCK IMPACT 


• Yield on gateway services continued to improve. 

  • SATS continued to demonstrate pricing power with ASP rising 6.6% yoy. This offset the 4.2% yoy decline in volume. 
  • Going forward, we expect ASP growth to be maintained and have assumed lower yoy decline in volume. 

• Resumption of JetstarAsia contract will be a further catalyst to continue owning the stock. 

  • SATS has regained the ground handling contract from ASIG in late-July and will provide scale for the gateway services operation. JetstarAsia has been aggressively adding capacity but rival Tigerair has been cutting capacity. 
  • JetstarAsia’s 40 weekly flights will add 1.6% to 1QFY16 flights handled although margins on narrow bodied aircraft are lower. 

• TFK’s revenue should rise in 2HFY16 and losses could reverse. 

  • Management specifically indicated that TFK’s earnings should improve in 2HFY16 due to an earlier restructuring as well as maiden contribution from Delta Airlines. 
  • TFK had signed a multi-year S$325m contract with Delta Airlines, which will start to contribute from Sep 15. 


EARNINGS REVISION/RISK 


• No change to our earnings forecasts. 

  • However, there is some upside risk to our earnings as our current numbers imply 6.6% yoy net profit growth vs ytd 8.8% yoy growth. 


VALUATION/RECOMMENDATION 


• Maintain BUY. 

  • SATS has gained 20.7% ytd and 14.6% since we last upgraded the stock. 
  • It has clearly outperformed the FSSTI and we reckon could still outperform the benchmark (-0.3% ytd). 


SHARE PRICE CATALYST 


  • Improved operating numbers. 
  • Higher-than-expected savings from licensing fees. 


(K Ajith )

Source: http://research.uobkayhian.com/




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