SATS Ltd - RHB Invest 2016-02-15: Defensive Stock Despite Expensive Valuations

SATS Ltd - RHB Invest 2016-02-15: Defensive Stock Despite Expensive Valuations SATS LTD S58.SI 

SATS Ltd - Defensive Stock Despite Expensive Valuations 

  • 9MFY16’s SGD167.4 profit (+16% YoY) was in line with our and consensus FY16 estimates, with profit growth aided largely by cost benefits arising from food distribution de-consolidation as revenue continues to fall. 
  • Maintain NEUTRAL and DCF-based SGD3.70 TP (4% downside) as a net cash balance sheet, stable dividend yield and continuing earnings growth (mostly from cost reductions) in a weakening economic environment would continue to support SATS’ current expensive valuation. 

Continuing operational improvement. 

  • SATS reported QoQ improvements across all operating metrics for both food solutions and gateway services businesses, leading to a 4% QoQ growth in 3QFY16 (Mar) revenue. 
  • Gateway services grew faster than food solutions, though, aided by strong growth in cargo volumes (+7.5% QoQ). 
  • Food solutions’ revenue growth was largely aided by non-Singapore businesses, as domestic topline was largely unchanged QoQ. 
  • In line with expectations, revenue from Japan (subsidiary TFK Corp) grew 13% QoQ and 15% YoY amidst contributions from the Delta Airlines contract during the quarter. However, the business continues to be loss making. 

Not much margins expansion from lower staff costs yet. 

  • After expanding for five successive quarters, SATS’ operating margins were unchanged QoQ at 14% in 3QFY16. 
  • Contrary to our expectation of operating cost reductions being led by productivity improvement and increased automation (leading to lower staff costs), most cost reductions in this quarter was aided by cost de-consolidation related to food distribution business to the BRF joint venture (JV). 
  • Staff cost as a percentage of revenue remained unchanged at 48% for past three quarters. 
  • However, we maintain that lower raw material costs and strong control on growth in staff costs compared to revenue growth ought to help SATS achieve a 14.9% net margin in FY17 (FY16F: 13.5%, FY15: 11.2%). 

Continuing weak economic environment increased downside risks. 

  • Weak revenue in Singapore and lower QoQ contributions from associates and JVs highlights the rising risk of weakening demand for air travel within the Asian region. 
  • As most of SATS’ estimated growth is supported by cost reductions, a weak economic environment leading to lower-than-estimated revenue growth does increase the downside risk to its organic earnings expansion. 

Retain NEUTRAL. 

  • Despite trading at 1.5x FY17 PEG, SATS’ share price has outperformed Singapore’s STI Index by 12% YTD. 
  • Continuing operational improvements and earnings growth has led to the stock’s outperformance. 
  • We believe the company’s net cash position of SGD300m, a sustainable dividend yield of almost 4% and continuing earnings growth of 11.6% in FY17 – despite the weak economic environment – ought to provide support to its share price around current levels.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2016-02-15
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.70 Same 3.70