SATS Ltd - CIMB Research 2016-02-15: Reaching a plateau

SATS Ltd - CIMB Research 2016-02-15: Reaching a plateau SATS LTD S58.SI 

SATS Ltd - Reaching a plateau 

  • 3Q16 net profit of S$60m was in line with our expectations. 9M16 net profit of S$167m (+2% yoy) formed 75% of our and consensus FY3/16 forecasts. 
  • TFK revenue up qoq, helped by Delta, but not profitable yet due to cost pressure. 
  • Steady EBIT margin of 14%, still from the deconsolidation of food distribution. 
  • Organic growth is tepid with the risk of looming economic sentiment that affects long-haul travel. Valuation is at +1 s.d on P/E and +2.5 s.d on P/BV historical trend. 
  • SATS is a relative call vs. other sectors given its earnings growth and net cash position. Maintain Hold, with an unchanged target price S$3.98 still based on DCF

■ Gateway lifted by cargo volume 

  • Overall revenue up 4% qoq in 3Q16 to S$441m. Gateway outperformed food solutions during the quarter as revenue grew 6% qoq to S$189m, thanks to seasonal strength in cargo volume in Changi (+7% qoq). Flights handled were up 4.9% qoq to 34.9k, stronger than Changi’s growth of 1.7% while passengers handled were up 4.6% qoq to 11.8m, in line with Changi’s growth of 4.9%. 

■ Delta’s contribution helped TFK; Singapore was flat 

  • Food solutions revenue was up 3% qoq to S$251m, mainly due to stronger contribution from TFK Japan (+13% qoq to S$60m) as Delta’s contract started to kick in from Oct 15. However, Singapore’s revenue was flat at S$348m as unit meals remained unchanged at 5.6m in 3Q16, a reflection of long-haul load factor pressure on the back of looming economic sentiment. Weak demand for business class travel on rampant investment bank retrenchments could put pressure on unit meals in the near term. 

■ Still benefitting from cost deconsolidation, not automation 

  • EBIT margin remained steady at 14% qoq as SATS continues to enjoy the deconsolidation of food distributions’ costs to BRF JV. Both raw materials and ‘other costs’ were kept steady at 16% and 7% of revenue, respectively. However, staff costs grew 5.8% qoq to S$212m, an escalation faster than its 4% qoq revenue growth. We still believe that the positives from automation is limited. 

■ Associates slipped 

  • Contribution from associates/JVs was down 2.5% qoq to S$11.6m, mainly from food solutions associates in China, Maldives and India. We see risks of further deceleration as China’s slowing growth and depreciating Rmb could squeeze outbound travel. 

■ Valuation not cheap, no room for error 

  • Without the effects of cost deconsolidation in FY17-18, its organic growth is tepid with the risk of deterioration if global travel sentiment is affected by a recession. We would watch out for signs of cracks if operating statistics from gateway services start to deteriorate. SATS was trading at c.10x forward P/E during the GFC. For now, SATS is still a keeper on its strong net cash (S$310m) and earnings growth, relative to other sectors.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-02-15
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.98 Same 3.98