SATS - DBS Research 2016-02-15: Helped By Better Traffic, Brf Disposal

SATS - DBS Research 2016-02-15: Helped By Better Traffic, Brf Disposal SATS LTD S58.SI 

SATS - Helped By Better Traffic, Brf Disposal 

  • 3Q16 earnings in line, led by better margins from the disposal of the low margin BRF business 
  • Upside largely priced in at +1.5SD PE valuation 
  • Limited downside, stock supported by 4% yield 
  • Maintain HOLD and S$3.65 TP 


Better earnings traction priced in. 

  • We believe that upside is capped. 3Q16’s seasonally stronger performance was in line with expectations, led by higher passenger and flight volumes and uptick in TFK recovery. 
  • Despite improving numbers from Changi and TFK, the stock is valued at +1.5SD of its four-year mean PE valuation and -1.5SD of its three-year historical dividend yield, suggesting that the better earnings prospects are already reflected in the current price. 
  • Our earnings forecast has already assumed a modest 7% earnings growth for FY17F, backed by revenue growth from higher aviation activity and margin improvement from cost efficiencies. 

4% dividend yield lends support to share price. 

  • We also believe that downside to the stock is limited since it is supported by 4% dividend yield. 
  • SATS generates strong cashflows and has a net cash balance sheet capable of supporting current DPS of 14-15 Scts going forward, with little risk of any DPS cut. 

Higher earnings to be backed by better cost structure. 

  • 3Q16’s e. revenue continued to lag 3Q15 (-2% y-o-y) but EBIT grew 21% y-o-y largely due to the absence of low margin BRF business, which was disposed in 1Q16. Hence, we believe higher margins will now be sustainable. 

Valuation: 

  • Blended DCF model and PER valuation methodology. Both valuation matrices account for stable predictable cashflows and potential earnings growth. 
  • Our TP, which is based on the average of discounted cash flow (DCF) valuation (7.7% weighted average cost of capital and 2% terminal growth assumption) and price-earnings valuation pegged to 17x FY17F earnings, is S$3.65. 

Key Risks to Our View: 

  • SATS could see further earnings and TP upside through stronger-than-expected recovery at Changi and regional aviation traffic.



Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2016-02-15
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.65 Same 3.65


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