SATS Ltd - OCBC Investment 2015-11-05: 1HFY16 largely in-line with our expectations

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SATS LTD S58.SI 

SATS Ltd: 1HFY16 largely in-line with our expectations 

 Higher margins on efficient operations 

 Expects stable growth ahead 

 Maintain HOLD 

Operational improvements continued into 2QFY16 

• SATS Ltd (SATS) posted a strong 2QFY16 as PATMI grew 26.8% YoY to S$59.7m despite a 4.2% decline in revenue to S$422.7m. 
• 2QFY16 revenue from Food Solutions (FS) declined 9.1% YoY mainly due to the transfer of its food distribution business (SFI) to the new JV with BRF S.A. and weakening of Yen; but partially offset by a 2.9% growth in Gateway Services (GS). 
• 2QFY16 operating margin improved by 4.4ppt YoY to 14% as efforts to manage costs and drive productivity led to a 9.1% YoY decline in operating expenses across all expense categories except for depreciation and amortisation (in-line with investments in automation). 
• 2QFY16 net margin rose 3.4ppt YoY to 14.1%, helped by a 10.2% increase in contribution from overseas associates and JVs to S$11.9m. 
• For 1HFY16, SATS’ revenue declined 4.3% to S$839.6m but core PATMI came in largely in-line with our expectations as it rose 18.0% to S$106.8m, which formed 50.8% of our FY16F forecasts. 

Outlook remains stable 

• Going forward, we believe SATS will continue to record stable growth on: 
  1.  continuous efforts to control costs, automate processes and drive productivity are likely to lead to sustainable reduction in operating expenses; 
  2.  growth in its cargo business that commands higher margins (e.g. cold chain facility); 
  3.  growth in overseas associates and JVs for both FS and GS segments; 
  4.  full quarter contribution from 3QFY16 onwards having re-acquired Jetstar Group as its client for GS segment (up to 40 flights/day); 
  5.  improving performance from its Japanese subsidiary, TFK – contribution from the recent contract win to support Delta’s flight operations in Tokyo to commence from 3QFY16 but likely toned down by weakening Yen; and lastly, 
  6.  strong pipeline of overseas investment opportunities. 

Decent dividend yield; maintain HOLD 

• With in-line 1HFY16 results, we opt to keep our forecasts largely unchanged. 
• Keeping our DDM-derived FV at S$3.78 (2% terminal growth; 6.9% cost of equity), maintain HOLD, supported by FY16F dividend yield of 4.1%.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2015-11-05

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.78 Same 3.78