SATS - DBS Research 2015-11-05: Lifted by BRF disposal

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SATS LTD S58.SI 

SATS - Lifted by BRF disposal 

• 2Q16 above on lower opex, largely from BRF disposal. 
• Interim DPS of 5 Scts declared. 
• Raise FY16F/FY17F earnings by 4%/6%. 
• Maintain HOLD, TP raised to S$3.65. 

BRF disposal led to lower costs and higher than expected earnings. 

• 2Q16 (FYE Mar) earnings of S$59.7m (+27% y-o-y) were ahead of our expectations as its food unit BRF S.A., which was spun off into a JV on 3 June, provided much relief to opex (S$363.5m, -9% y-o-y). 
• Along with prudent cost control measures, EBIT margins improved 4.4ppts to 14%. 
• Loss of revenue contribution from BRF also led to some disappointment in revenue (S$423m, -4% y-o-y) despite Changi showing an improvement in passenger/aircraft numbers. 
• TFK turned in a sequentially stronger performance (S$53.2m, +9% q-o-q), led by better Narita traffic and new accounts, but its revenue was below 2Q15 (-10% y-o-y). 
• An interim DPS of 5 Scts was proposed for 1H16, in line with our expectations. 

Anticipate better margins ahead; raise FY16-17F earnings by 4-6%. 

• We believe that BRF may not have been profitable since the disposal of BRF had shown an uptick in SATS’ performance. The permanent absence of BRF’s contribution to SATS hence suggests a sustainable improvement in margin structure. 
• We have revised our FY16-17F earnings by 4-6% to reflect the better cost structure and margin outlook. Our revenue projection is also lower, given the absence of contribution from BRF, but is partly offset by a small improvement in passenger and aircraft traffic at Changi on the back of last year’s low base. 

Maintain HOLD, with higher S$3.65 TP. 

• The better 2Q16 earnings were mainly driven by productivity improvements and the disposal of BRF. We envisage higher earnings ahead from potential recovery in Changi’s numbers and cost controls. However, valuations are steep at +1.5SD of its four year mean PE and -1.5SD of its three year historical dividend yield. 
• We will turn more positive on the stock when 
  1. valuations correct to more palatable levels; and/or 
  2. Changi continues to recover on a more sustained basis. 
• Our TP based on average of DCF and PE valuations is nudged up to S$3.65, backed by higher earnings estimate and rolling over earnings base to FY17F. 
• Maintain HOLD.

Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2015-11-05

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.65 Same 3.43