SATS Ltd - CIMB Research 2015-11-04: Deconsolidating costs to JV

SATS LTD S58.SI

SATS Ltd - Deconsolidating costs to JV

2QFY3/16 net profit of S$59m in line with our and consensus expectations. 1HFY16 net profit of S$107m at 52% of our FY16 forecast.
Deconsolidation of low-margin food distribution arm to BRF JV saved costs.
Interim dividend of S5cts maintained. Net cash position of S$294m
Our FY16-17 EPS adjusted by 4-8% on lower costs offset weaker revenue growth. This lifts our target price (blended 17x CY17 P/E and DCF) (S$3.98).

Trades at 19x FY17F P/E, or +1 s.d. of its historical valuations. We believe the positives of margin expansion and volume growth are in the price. Maintain Hold.

2QFY16 group revenue was up 1% qoq and down 4% yoy to S$423m. The steady qoq performance was a result of growth in the number of passengers and flights it handled in Changi (1-2%), boosted by the return of Jetstar contract and volume growth in Japanese subsidiary TFK.
Gateway revenue rose 2% qoq to S$179m and food solutions revenue grew 1% qoq to S$241m. The yoy drop in group revenue was mainly due to deconsolidation of its food distribution revenue (S$29m) to BRF JV.

JV Group EBIT margin improved to 14% in 2Q16 (FY15: 10%) as SATS benefited from the deconsolidation of food distribution’s costs that had poor operating leverage to BRF JV. As a result, raw materials (previously c.20% of sales, now 18%) shrank 19% yoy and 4% qoq to S$73m while other costs (fuel, transportation, chiller costs) dropped by 28% yoy and 15% qoq to S$28m.
Staff cost (47.5% of sales) was steady at S$200m with some headcount transfer to BRF JV. Automation of process played a small part, in our view.

TFK made a small profit in 2QFY16, thanks to market share gains on the back of a lower cost environment post its restructuring exercise in 4QFY15. Sequential qoq improvement will be evident from 3QFY16 when the company’s in-flight catering contract with Delta Airlines starts contributing revenue in Oct 15.

Contribution from associates/JVs was at S$11.9m in 2Q16 (-7% qoq, +10% yoy).
Dividend received from associates/JVs totaled S$26m in 1H16, similar to FY14 (S$22m). Note that dividend received in FY15 of S$89m was considered abnormal. Associates earnings will likely improve from FY17 with the acquisition of Brahim’s Airline Catering as well as volume ramp up in BRF JV (tie-up with BRF’s meat processing capacity).

The stock has outperformed by 23% in the past 12 months and we believe the positives from its volume growth are in the price.
Cost transfer to the BRF JV may be a one-off and further improvements from its automation process will be gradual.
Maintain Hold.
Potential re-rating catalysts include earnings-accretive M&As and stronger-than-expected pick up in aviation travel.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-11-04

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.98 Up 3.69