SATS - UOB Kay Hian 2016-04-22: 4QFY16 Results Preview ~ Earnings Expected To Beat Street Estimate

SATS - UOB Kay Hian 2016-04-22: 4QFY16 Results Preview ~ Earnings Expected To Beat Street Estimate SATS LTD S58.SI 

SATS (SATS SP) - 4QFY16 Results Preview: Earnings Expected To Beat Street Estimate 

  • We expect SATS to post 11% yoy growth in 4QFY16 core net profit, beating the street’s estimate. 
  • 4QFY16’s earnings growth is likely to be driven by incremental gateway services revenue flowing through to the bottom line on the back of higher unit services. 
  • Maintain BUY. Target price: S$4.50. 


WHAT’S NEW 


 We expect core 4QFY16 earnings to rise 11% yoy 

  • We expect core 4QFY16 earnings to rise 11% yoy on the back of higher unit services and unit meals. Earnings growth would be primarily driven by incremental gateway services revenue flowing through to bottom line. 
  • Meanwhile, opex is expected to fall in 4QFY16 on the back of lower raw material cost, utilities expenses and licensing fees. Core net profit is expected to rise 11% yoy while net profit including extraordinary items (gains from sale of 22 Senoko Way) should rise 28%. 
  • Our 4QFY16 core net profit estimate is 6% above consensus. We also forecast a final dividend of 13.3 S cents/share (+48% yoy). Our full-year DPS estimate is 20% above consensus (15.2 S cents). 

 Unit services grew 14.5% yoy in 4QFY16, the highest in three years. 

  • This was likely due to increased visitor arrivals to Changi Airport in 4QFY16, a trend which we highlighted in our Singapore Aviation piece on 1 Apr 16. 
  • Another reason could be due to the low base in 4QFY15 as it excluded the JetStar Asia contribution. Thus, we expect higher gateway services revenue (+9% yoy) in 4QFY16 due to higher volume of flights handled, partly offset by a lower ASP. 
  • We have assumed that ASP for unit services would remain flat qoq. 

 Unit meals also rose 5.1% yoy. 

  • The lower growth in unit meals relative to pax handled was likely due to a higher proportion of low-cost carrier (LCC) flights, which typically do not serve meals on flights. Nonetheless, the 5.1% growth in unit meals is higher than 3QFY16’s (+4.3%), which is encouraging. 
  • Excluding Singapore Food Industries (SFI) we expect in-flight catering revenue to rise by 6% yoy. 


STOCK IMPACT 


 SATS has risen 7.6% ytd, outperforming the FSSTI by 4.8%. 

  • The relative outperformance was due to SATS’ strong balance sheet and high quality of earnings as well as its continued operational strength in an environment of weak corporate earnings. 
  • Going forward, should SATS achieve higher margins on gateway services or benefit from increased scale at TFK, this would have positive implications on future earnings growth and stock price. 

 Key numbers we would be focusing on in the 4QFY16 results are: 

  1. margins on gateway services, 
  2. the degree of improvement in TFK’s performance from the commencement of the Delta Airlines contract, and 
  3. the extent of profit contribution from JVs and associates. 


EARNINGS REVISION/RISK 


 No change to our earnings estimates. 

  • Our previewed 4QFY16 earnings estimate is higher than the 4QFY16 net profit implied by our full-year estimate. 
  • We would revise our numbers following the release of the full-year results in May. 


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%). SHARE PRICE 


CATALYST 

  • Better-than-expected gateway services margins and higher profitability of TFK.



K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-22
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.50 Same 4.50


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