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SATS Ltd - CIMB Research 2016-04-29: Volume game

SATS Ltd - CIMB Research 2016-04-29: Volume game SATS LTD S58.SI 

SATS Ltd - Volume game

  • We left the 2016 Tourism Industry Conference ‘Sharpening Our Strategies Towards Quality Tourism’ by Singapore Tourism Board (STB) feeling positive. 
  • STB’s efforts could sustain our forecast of 16.2m (+6.6%) tourists to Singapore in 2016. We believe SATS will be a key beneficiary of the tourist arrival strength. 
  • We upgrade our FY16-18F EPS by 3-9% for higher revenue and margin (permanent accounting benefit from deconsolidation to stay) assumptions. 
  • Upgrade SATS from Hold to Add, with a higher target price of S$4.61, based on blended DCF and 19x CY17 P/E. 


Telling the Singapore story

  • Tourist arrivals in Singapore could be sustained moving forward, based on systematic marketing strategies shared during the 2016 Tourism Industry Conference ‘Sharpening Our Strategies Towards Quality Tourism’ by Singapore Tourism Board (STB). 
  • STB’s strategies include: 
    1. pushing into second-tier cities in China and new markets such as Myanmar, 
    2. focusing on long-haul European market by collaborating with cruise liners, 
    3. the adoption of robotics technology, and 
    4. tackling manpower issues. 

A more crowded Singapore

  • We attribute the 12% yoy growth in tourist arrivals in Jan-Feb 16 to STB’s efforts over the years. 
  • We deduced from SATS’ steady 4QFY16 (Jan-Mar) passengers handled of 11.7m (3QFY16: 11.8m) that Changi passenger movement for Mar 16 may sustain its momentum of 10% yoy growth. 
  • Assuming that SATS retain 81% market share, our backward calculation shows that Changi could have seen 5m passenger movement in Mar 16, adding 1.3m tourists in Singapore for the month. 

Expect 16.2m tourists in 2016, STB forecast based on bear case

  • Based on a conservative 5% growth from Apr-Dec 2016, we expect tourist arrivals to reach 16.2m (+6.6% yoy) in 2016. This is likely to be driven by the influx of Chinese tourists, which has seen exponential growth of +63% yoy in Jan and 16% yoy in Feb. 
  • STB’s target of 15.2m-15.7m for 2016 implies zero growth to 2% decline in tourist arrivals for the months of Apr-Dec 2016. This is a bear case, in our view. 

Deconsolidation of BRF is accounting benefit but here to stay

  • Raw materials cost/sales ratio has consistently dropped from c.20% in FY15 to a low of 16.2% in 3Q16, following the deconsolidation of food distribution business to BRF in 2Q16, resulting in EBIT margin expansion from c.10% in FY15 to 14%. 
  • We give management credit for the cost saving benefits of c.S$76m p.a (S$19m/quarter) arising from this permanent accounting treatment. 
  • We raise our EBIT margin estimates from 12% to 14% for FY17-18. 

Upgrade from Hold to Add

  • Compared to SIE and STE that are net cash and have decent dividend yield but trade at 18-22x with zero earnings growth in FY17, SATS’ superior c.10% EPS growth in FY17 deserves a premium valuation, in our view. 
  • We upgrade our target price from S$3.98 to S$4.61, based on blended DCF and 19x CY17 P/E (1s.d. above historical mean). 
  • Potential catalysts include stronger Changi data and earnings-accretive M&A.




LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-04-29
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.98 Same 3.98


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