SATS - UOB Kay Hian 2015-11-05: 2QFY16: Impressive Results; Appetite For More

SATS - UOB Kay Hian 2015-11-05: 2QFY16: Impressive Results; Appetite For More SATS LTD S58.SI 

SATS (SATS SP) 2QFY16: Impressive Results; Appetite For More 

  • We are impressed with SATS’ 2QFY16 earnings, which beat our expectations, amid better-than-expected cost control. Much of these cost savings will continue into the coming quarters and will be supplemented with revenue growth from TFK. 
  • Longer term, we believe SATS is likely to expand its presence into China via its JV partners, CEA and CSA. 
  • We raise our FY16-17 net profit forecasts by 9.6% and 7.8% respectively. 
  • Upgrade to BUY and raise our target price by 15% to $4.50. 


RESULTS 


• Strong set of results and above our expectations of an 18% growth. 

  • Deconsolidation of a low-margin, wholly owned subsidiary into an associate led to opex declining faster than revenue. SATS also benefitted from lower licensing fees (-16.0%) due to rebates from Changi Airport Group. SATS also cited ongoing productivity and lower fuel costs as instrumental in reducing costs. Interim dividend remained unchanged at 5 S cents. 

• Excluding the deconsolidation of SATS-BRF, top-line would have risen 2% yoy. 

  • The disposal of a subsidiary and the partial disposal of SATS-BRF led to a S$31m decline in revenue, without which, food solutions revenue would have risen 2.4% yoy. The depreciation of the yen accounted for a further S$5m drop in revenue. 

• Operating cash flow before working capital changes and FCF rose 25.2% yoy and 65.1% yoy respectively. 

• TFK was marginally profitable

  • TFK was marginally profitable although SATS guided greater improvement in 2HFY16 due to the commencement of the contract from Delta Airlines. The reduction of overall catering capacity at Narita and Haneda could also improve pricing, while rising Chinese visitor arrivals could improve scale and operating efficiency. 

• Overall, associates and JVs income improved 10.2% yoy, contributing to the record high net profit growth. 

  • Gateway services accounted for the bulk of associate earnings, however, most of the growth in associate income accrued from food solutions. About 80% of associate income was contributed by the Greater China and Indonesian associates. Noticeably, SATS-BRF, which was equity accounted in 2QFY16, did not dent associate and JV growth. 

STOCK IMPACT 


• Earnings driven by not just cost savings but by revenue growth as well. 

  • Much of the cost savings, except for Changi airport rebates, are likely to sustain into FY17 and beyond. In addition, there is scope for top-line improvement and additional operating leverage from the commencement of the contract with Delta Airlines. 

• Longer term, SATS is likely to look towards China for growth. 

  • SATS already has an established presence in Beijing and Tianjin, offering both gateway services as well as food solutions, via its partners China Eastern Airlines (CEA) and China Southern Airlines (CSA). 
  • We believe there is scope for further expansion into China via its existing partners at select secondary hubs. A key driver for this would be strong growth in Chinese outbound traffic, which in traffic km terms is growing at double the rate of domestic travel. 
  • Given that meals are more often served on international flights than on domestic flights, further investment into flight catering makes commercial sense. The urgency is best underscored by Hainan Airlines’ recent purchase of European in-flight and gateway services provider, Swissport. 

EARNINGS REVISION/RISK 

  • We raise our FY16 and FY17 net profit forecasts by 9.6% and 7.8% respectively, after adjusting for lower opex and revenue post-deconsolidation. 


VALUATION/RECOMMENDATION 


• Upgrade to BUY, raise target price to S$4.50 (from S$3.90). 

  • We are impressed by SATS’ ability to manage costs as well as grow top-line. We also believe SATS could raise dividend payout ratio to 85% (FY15: 80%), in which case its final dividend could rise by 40% to 12.8 S cents. 
  • More importantly, we believe SATS deserves to trade at a higher PE multiple due to improving ROE and M&A potential. 

SHARE PRICE CATALYST 

  • M&A in China.


K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-05
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 4.50 Up 3.90


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