SATS Ltd - CIMB Research 2015-12-09: As good as it gets

SATS Ltd - CIMB Research 2015-12-09: As good as it gets SATS LTD S58.SI 

SATS Ltd - As good as it gets 

  • The effects of sharp qoq margin expansion may not repeat post de-consolidating BRF’s costs to JV. EBIT margin is likely, in our view, to be capped at 12-13%. 
  • Long-term Singapore Changi growth story intact. 
  • The stock is trading at FY17F P/E of 19x, or +1s.d. of its historical valuations, fairly reflecting the underlying earnings growth of 4-5%in FY17-18F 

■ Margin expansion may be capped 

  • Group EBIT margin improved to 14% in 2Q16 (FY15: 10%), which we attribute it mainly to the deconsolidation of low-margin food distribution business from SFI to BRF JV. 
  • Historically, the food distribution arm generated EBIT margin of c. 7%. 
  • SATS’ overall costs dropped by S$36m yoy from S$400m in 2Q15 to S$363m in 2Q16, but we saw an increase in the amount due from assoc/ JV of S$32m, which could have reflected the deconsolidation of costs. 

■ Underlying growth factored in 

  • Our top-line growth forecast of 4-6% in FY17-18 has captured
    1. the short to medium growth in Singapore Changi Airport volumes, and 
    2. TFK’s turning around as market share increases and with Delta’s new contract. 
  • We have also factored in lower licensing fees at Changi Airport, which is still subject to negotiation with airlines for full passthrough effects. Rising labour cost is a constant challenge, and we believe the quantitative effects from process automation is a slow process. 

■ Stiff competition in cargo 

  • In the short-term, SATS’s cargo volume may also be capped on weakness in China’s economy that may affect intra-Asia trade. Its cargo volume handled in 2Q16 shrank 0.2% qoq 1% yoy to 389.1m tonnes in Singapore. 
  • Competition is intensifying for its Hong Kong cargo associate, Asia Airfreight Terminal (AAT), as Cathay Pacific started its own cargo terminal in 2014, flooding the market with 2.6m tonnes of additional cargo capacity. 
  • AAT also faces increasing labour costs, as the market is struggling with a labour shortage. 

■ Maintain Hold 

  • The stock has outperformed by 32% in the past 12 months, and we believe the positives from its volume growth are in the price. 
  • Cost transfer to the BRF JV may be a one-off benefit, and further improvements from its automation process will be gradual. 
  • We maintain our Hold recommendation. 
  • Potential re-rating catalysts include earning saccretive M&As and stronger-than-expected pick up in aviation travel.
  • TP S$3.98.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-12-09
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.98 Same 3.98