SATS - UOB Kay Hian 2016-02-03: 3QFY16 Results Preview ~ Expected To Deliver 20% Earnings Growth

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SATS LTD S58.SI 

SATS (SATS SP) 3QFY16 Results Preview: Expected To Deliver 20% Earnings Growth 

• SATS will report its 3QFY16 results on 12 Feb 16 and we expect 20% yoy earnings growth. 
• SATS has outperformed the FSSTI by 15% ytd. In an environment of weak corporate earnings, we expect SATS to continue to outperform due to strong earnings growth, M&As and a strong balance sheet. 
• Maintain BUY. Target price: S$4.50. 

WHAT’S NEW 

• We expect SATS to post 20% net profit growth for 3QFY16 on the back of higher unit services (+10%) and unit meals (+4.3%). 

• The increase in unit services and flights handled in 3QFY16 was very likely due to the resumption of the JetStar Asia contract last September, as well as the launch of additional flights by Tigerair and JetStar Asia. 
• The increase in unit meals is in line with Changi Airport pax throughput growth. 
• Our 9MFY16 net profit estimates account for 74% and 77% of our and consensus’ full-year estimates respectively. 

• We also expect food solutions revenue to improve qoq, driven by an increase in meals at TFK with the commencement of the catering contract with Delta Airlines in 3QFY16. 

• Top-line, however, is expected to decline yoy due to the deconsolidation of the Singapore Food Industries’ (SFI) food distribution business. 
• Excluding that, revenue would likely have grown by approximately 3.8%, assuming the deconsolidation impact remain unchanged from 2QFY16’s. 

• Opex expected to fall 8% yoy on the back of lower licensing fees, raw materials and utilities costs. 

• Rebates from Changi Airport should lead to reduced licensing fees, while raw material prices are expected to decline in line with lower commodity prices. 
• We also expect lower utilities expenses as a result of lower utility rates with the fall in energy costs. 
• In addition, we also expect positive operating leverage from the commencement of the Delta Airlines contract in 3QFY16, as well as the resumption of the JetStar Asia contract. 
• Hence, we estimate 3QFY16 EBIT margins to rise by 3.9ppt to 15.2%. 

• Assuming flat or lower contribution from associates. 

• We have conservatively assumed lower income from associates and JVs in 3Q due to currency weakness in China and Indonesia. 

STOCK IMPACT 

• Recent JV with Wilmar highlights SATS’ focus for growth - China. 

• SATS continues to broaden its focus outside of Singapore. We view SATS’ 60-40 JV with Wilmar’s wholly-owned subsidiary Yihai Kerry Investments to provide high quality and safe food in China favourably. 
• While the initial investment of Rmb120m (S$26m) is relatively small, we believe that the JV has scope for expansion as it would be able to tap onto SATS & BRF’s favourable reputations as premier food producer and distributor, while tapping onto Wilmar’s retail distribution network in China. 

• SATS is on an M&A trail, but recent acquisitions can be funded by annual cash generation. 

• Over the past seven months, SATS has announced four JVs or acquisitions outside Singapore, which will enhance its reach in new markets as well as provide scale to its Singapore operations. They are: 
  1. the increased stake in MacroAsia (their Philippines food solutions associate), 
  2. the acquisition of a 49% stake in Brahim, 
  3. the JV with DFASS, and 
  4. the JV with Wilmar. 
• These investments amount to S$114m, which can easily be funded by recurring free cash flow (RCF). 
• As of 30 Sep 15, SATS had a cash balance of S$403m, and SATS is expected to generate RCF of S$236m in FY16, excluding the latest investments. 
• We have yet to factor in contributions from the M&A activities in our full-year earnings estimates. 

• Key numbers we would be focusing on are: 

1. changes in unit meal prices, 
2. the extent of staff cost declines, 
3. potential improvement in profits from JVs and associates, and 
4. management’s guidance on new JVs. 

EARNINGS REVISION/RISK 

• No changes to our earnings forecast. 

VALUATION/RECOMMENDATION 

• Maintain BUY and unchanged target price of S$4.50. 

• We continue to value SATS on a DDM basis (required return: 6.5%, terminal growth rate: 1.5%). 
• We like SATS for its strong cash generation ability, M&A potential, as well as its rising ROEs from: 
  1. improved profitability of TFK, and 
  2. higher contribution from increased unit services volumes due to the resumption of the JetStar Asia contract. 
• Maintain BUY with a target price of S$4.50. 
• Our target price of S$4.50 implies current PE and dividend yield of 21.5x and 4.0%, and forward PE and dividend yield of 20.7x and 4.1% respectively. 

SHARE PRICE CATALYST 

• Lower staff costs and licensing fees.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-03

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.50 Same 4.50