SATS Ltd - OCBC Investment 2016-02-15: Focus on productivity gains bearing fruits

SATS Ltd - OCBC Investment 2016-02-15: Focus on productivity gains bearing fruits SATS LTD S58.SI 

SATS Ltd: Focus on productivity gains bearing fruits 

  • 3QFY16 above our expectations 
  • Diversifying beyond core businesses 
  • Decent 4.3% forward dividend yield 

Decline in expenses outpaced revenue drop 

  • SATS Ltd (SATS) posted a strong 3QFY16 results as PATMI grew 12.8% YoY to S$60.6m despite a 2.2% decline in revenue to S$441.0m. 3QFY16 revenue from Food Solutions (FS) declined 7.1% YoY mainly due to the transfer of its food distribution business to the new JV; but partially offset by a 5.3% growth in Gateway Services (GS). 
  • Operating expenses decreased 5.1% YoY to S$379.2m, as expenses across all categories declined except for staff costs and depreciation and amortisation (in-line with investments in automation). 
  • 3QFY16 net margin rose 1.8ppt YoY to 13.7%, as decline in expenses outpaced drop in revenue. 
  • Contribution from overseas associates and JVs was 15.9% YoY lower at S$11.6m. SATS’ 9MFY16 revenue declined 3.6% to S$1.28bm but core PATMI came in slightly above expectations as it rose 16.0% to S$167.4m and formed 78% of our FY16 forecasts. 

Building up adjacent businesses for longer term growth 

  • We like SATS’ strategy in its continuous focus on productivity gains through adoption of new technology and driving economies to scale, allowing it to withstand headwinds arising from global economic uncertainty. 
  • Over the longer term, we believe SATS’ strategy in building up adjacent businesses will allow it to broaden its revenue base. The recent ones include: 
    1. forming travel-retail JV with DFASS Singapore to provide inflight and ground-based duty-free/paid sales of liquor and merchandises, and 
    2. forming JV with Wilmar to supply certain safe and high quality food in China market. 
  • We believe Wilmar’s strong existing presence in China will help the JV win contracts while SATS strength in large centralized kitchens to help lower costs. 
  • With strong cash-generation ability, we expect SATS to continue its expansion beyond its current core businesses, so as to achieve a broader-based revenue growth over the longer term. 

Maintain HOLD on higher FV 

  • We believe productivity gains will continue to bear fruits and raise our FY16/17F PATMI by 4.2%/4.4%, respectively. 
  • Maintain HOLD as our DDM-derived FV increases from S$3.78 to S$4.00, supported by a decent forward dividend yield of 4.3%.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-02-15
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 4.00 Up 3.78