SATS Ltd - Phillip Securities 2016-02-15: Building scale, expanding footprint

SATS Ltd - Phillip Securities 2016-02-15: Building scale, expanding footprint SATS LTD S58.SI 

SATS Ltd - Building scale, expanding footprint 

  • 3QFY16 revenue of S$441.0mn in line with consensus expectations of S$432.0mn. 
  • 9MFY16 revenue of S$1.28bn is 75% of consensus expectations for FY16 S$1.71bn. 
  • 3QFY16 PATMI of S$60.6mn in line with consensus expectations of S$58.1mn. 
  • 9MFY16 PATMI of S$167.4mn is 75% of consensus expectations for FY16 S$224.6mn. 

Analyst Briefing Key Takeaways 

 Expanding geographical footprint and achieving scale – acquisition of 49% equity stake in Brahim's Airline Catering Holdings Sdn Bhd (BACH).

  • The acquisition was completed on 5 February. BACH is the main caterer at Kuala Lumpur International Airport (KLIA). 
  • Management is optimistic on BACH growing together with the newly restructured Malaysia Airlines Berhad (MAB), as well as absorbing customers of long-haul routes that MAB has terminated. 
  • BACH has ambitions to expand to non-aviation catering, and can leverage on SATS' experience in that area to create value. 
  • BACH will also try to provide halal catering outside of Malaysia. 
  • Management also expects to reap purchasing synergies, as most of SATS' raw materials (food) comes from Malaysia. 

 Leveraging on existing customer touch-points to increase sales channels.

  • SATS has entered into a 50:50 travel retail JV with DFASS (Singapore) Pte Ltd, named DFASS SATS Pte Ltd (DFASS SATS). This JV will be income-producing immediately, as it taps on DFSS' existing contracts. 
  • The goal is to enhance sales of other products along the customer's journey. 

 Meeting the demand to supply safe food in China. 

  • SATS has proposed a 60:40 stake in a food supply JV with Yihai Kerry Investments (YKI), a wholly-owned subsidiary of Wilmar International Limited. 
  • The JV will not have any immediate income as it will be start up from scratch. The intention is to build commissary kitchens in South China, and expansion will be in stages across new cities. 
  • The speed of expansion will be contingent on level of success observed. Management guided that there had been positive reception from potential customers during their due diligence conversations. 
  • Management expects construction and concurrent market activities to take up to a year, and the JV will be income-producing in FY17 onwards. 

Investment Actions 

  • We maintain "Accumulate" rating with unchanged target price of S$4.05. 
  • The target price represents an implied 20.0x FY16e P/E multiple.

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-02-15
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 4.05 Same 4.05