SATS Singapore Airport Terminal - RHB Invest 2015-11-05: Improving Outlook Already Priced In

SATS LTD S58.SI

Singapore Airport Terminal (SATS SP) - Improving Outlook Already Priced In

1HFY16’s (Mar) SGD107m profit (+18% YoY) made up 48% of our old FY16 estimate, with profit growth aided by declines in all operating costs save depreciation, as revenue remained weak (-4% YoY).
Stay NEUTRAL, with a higher SGD3.70 TP (from SGD3.35, 3% downside) as most of the upside from upcoming operational improvements is priced in.
We lift FY16F-17F profit by 5.6-8.5% to account for the continuing margin expansion and higher contributions from its JV in FY17.

In 1HFY16, while Singapore Airport Terminal’s (SATS) revenue dipped 4.3% to SGD840m, mainly from the transfer of its food distribution business to SATS BRF Foods JV and the weakening of the JPY, profit increased 18% YoY mainly due to lower costs. Staff (-1% YoY), raw materials (-15% YoY), licensing fees (-14% YoY) and utility costs (-8% YoY) together account for 88% of total operating cost.
Contribution from associates/JVs also increased 17% YoY as growth was registered both in its gateway and food businesses.

While TFK, its Japanese subsidiary, may book higher revenue in 2HFY16 aided by contributions from its Delta Airlines contract, overall revenue growth remains uninspiring in the near term, amidst moderate traffic growth at Singapore’s Changi Airport. However, management‘s emphasis on productivity improvement through increased automation and gradual reduction in staff costs should enable SATS to continue reporting a steady rise in margins.
We expect net margin to hit 14.9% in FY17F from 13.5% in FY16F and 11.2% in FY15.

We increase FY16F-17F estimates by 5.6-8.5% respectively to account for:
1. continuing improvement in operating margins,
2. higher revenue from TFK, and
3. higher contributions from associates and joint ventures in FY17.
Amidst a lack of sufficient details on the nature of earnings contribution, we have not included the recently announced Brahim’s acquisition in our earnings estimates.

SATS’ share price has risen 25% YTD as:
1. it continues to report operational improvements, and
2. on its inclusion in the Singapore's benchmark Straits Times Index.
Our DCF-based TP rises to SGD3.70 (from SGD3.35).
Stay NEUTRAL, as the stock is trading close to its historical high forward multiples.

Shekhar Jaiswal RHB Research | http://www.rhbinvest.com.sg/ 2015-11-04

RHB Research SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.70 Up 3.35