SATS - UOB Kay Hian 2016-02-15: 3QFY16 Beats Street’s Estimates; Outlines Long-term Plans

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SATS LTD S58.SI 

SATS (SATS SP) 3QFY16: Beats Street’s Estimates; Outlines Long-term Plans 

• While SATS has outperformed the FSSTI, we believe the stock will continue to outperform due to: 
  1. strong cash flow, 
  2. strong balance sheet, and 
  3. long-term growth prospects underpinned by expansion via new JVs. 
• We are also enthused by SATS’ organic revenue growth ex-deconsolidation of SATS-BRF and cost savings. 
• Maintain BUY. Target price: S$4.50. 

RESULTS 

• Good results with organic revenue growth. 

• SATS’ 3QFY16 net profit came in 4% higher than consensus estimates but 6% lower than ours. 
• The deviation from our estimates was due to higher-than-expected staff costs (+5.7% yoy) and a decline in associate and JV contributions. 
• Despite higher staff costs, SATS benefitted from broadbased cost reductions, leading to a 5.1% fall in opex. 
• 9MFY16 net profit accounted for 76% of consensus and 74% of our previous full-year estimates. 
• Excluding the deconsolidation of SFI’s food distribution business, revenue would have risen 6.5% yoy, higher than our previous estimate of 3.8%. 

• The decline in food solutions revenue was due to the deconsolidation of SATSBRF. 

• SFI’s food distribution business was transferred to the above associate, which led to the decline in revenue. However, inflight catering revenue out of Singapore and Japan (TFK) rose 5.4% yoy, highlighting the organic growth in the food solutions division. 
• TFK’s top-line grew 14.5% yoy with the commencement of the catering contract with Delta Airlines in 3QFY16 but did not contribute to bottom line due to transitional costs. 
• SATS indicated the full impact will be felt in six months. 

• Associate and JV contribution fell S$2.2m (-16% yoy). 

• The bulk of the decline resulted from a S$1.6m fall in gateway services contribution due to weakness in both North and South Asia, but SATS opined it does not believe that this represented the start of a trend. 

• FCF grew 27% yoy in 3QFY16 and 39% as at 9MFY16. 

• Excluding working capital changes due to the deconsolidation of SATS BRF, FCF grew 39% yoy to S$162m as at 9MFY16, generating a FCF margin on revenue of 12.6%. 
• Meanwhile, dividends from associates fell 62% yoy as at 9MFY16 but this was due to a return of capital in 9MFY15. 
• As at 9MFY16, payout amounted to 93%. 

STOCK IMPACT 

• We are enthused by organic top-line growth and cost savings… 

• The ability to generate a 6.5% top-line growth is a feat, given the current economic climate. The only area of disappointment was the weakness at overseas associates. 

• …and the long-term growth potential from recently announced JVs: 

1. Brahim Investment. SATS highlighted plans to expand beyond non-aviation catering and specifically mentioned expansion plans in Japan. We reckon it could introduce halal catering to TFK and this could be significant if Japan manages to court the Middle Eastern carriers. 
2. Food supply JV in China. SATS will construct manufacturing facilities in China, with the first facility targeted operational in the next 12 months. 

• We have thus assumed investments of S$20m per year in FY17 and FY18. 
• SATS indicated that: 
  1. the investments would be funded by a mixture of equity and debt, and 
  2. the debt would be renminbi-based, thus matching cash flow with cost. SATS is also optimistic on the JV and alluded that the news was greeted with “a lot of support” from potential customers. 
  3. Inflight duty-free retail JV. SATS will tap on DFASS’s expertise in duty-free in-flight shopping, diversify into a new revenue stream and deepen partnerships with key customers, such as SIA. 

EARNINGS REVISION/RISK 

• We raise our FY16 net profit estimate by 2.7% after factoring in gains from the sale of 22 Senoko Way and higher staff costs, and trim FY17 net profit estimate by 0.3% after assuming higher staff costs. 
• We also lower our maintenance capex forecasts for FY16 and FY17 by S$20m for both years as ytd capex was substantially lower than our initial estimates. 
• We assume SATS will fund the proposed manufacturing facility via internal funds of S$20m but have yet to assume any new debt. 

VALUATION/RECOMMENDATION 

• Maintain BUY and 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, rising ROE and long-term growth potential from JVs. 

SHARE PRICE CATALYST 

• Lower staff costs and licensing fees.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-15

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