SATS - Maybank Kim Eng 2015-11-05: Solid Earnings

SATS - Maybank Kim Eng 2015-11-05: Solid Earnings SATS LTD S58.SI 

SATS - Solid earnings 

  • 2Q16 in line. Solid earnings on strong margin expansion. 
  • Beneficiary of a pick-up in air traffic. TFK to turn profitable. 
  • Maintain HOLD. Raise TP to SGD3.82 from SGD3.21 on EPS upgrade and higher target multiple. 


Productivity efforts drove margin expansion 

  • 2QFY3/16 net income of SGD59.7m (+26.8% YoY, +20.4% QoQ) was in line with 1H16 at 49% of our full-year estimates. 
  • Revenue decline was due to the transfer of its food distribution business to thenew JV, which roughly broke even. 
  • EBITDA margin expanded by a strong 4.6ppt to 18.0% as it benefited from productivity efforts and lower raw material costs. 
  • Management sees acquiring an effective 34.3% stake in Brahim’s inflight catering business as an opportunity to participate in Malaysia’s aviation growth story, but declined to discuss details pending deal completion. It cautions that the current operating environment remains challenging. 

Benefits from uptick in traffic; TFK to turn profitable 

  • With oil prices staying low, we expect the impending decline in air ticket prices to stimulate travel demand and lift air traffic.SATS’s margins should expand as it benefits from positive operating leverage. 
  • We also expect TFK Corp, its inflight catering unit in Japan, to turn profitable in 2H16 on market consolidation and workload increase from new customer Delta Air from Oct 2015. 

TP raised on EPS upgrade and higher target multiple 

  • We raise our TP to SGD3.82 (from SGD3.21) after tweaking our EPS estimates and assigning a higher target multiple. 
  • We raise FY16- 18E EPS estimates by 1.5%-2.6% on positive operating leverage as workload should increase in the year ahead. 
  • We also roll forward our valuation basis to FY3/17E EPS and assign a higher target multiple of 18x (1SD above 10-year average) from 16x as we expect the market to reward the stock for its solid earnings growth profile. However, upside to the share price appears limited and we will look to accumulate at a better entry point. 
  • Maintain HOLD.


Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-11-05
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.82 Up 3.21


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