SATS - DBS Research 2016-05-26: Positive prospects priced in

SATS - DBS Research 2016-05-26: Positive prospects priced in SATS LTD S58.SI 

SATS - Positive prospects priced in

  • 4Q16/FY16 results in line; higher passenger volume offsets lower pricing in aviation food.
  • Growth outlook remains muted; recovery in aviation traffic dampened by low airline yields.
  • Valuations stretched at < 4% dividend yield and PE at +2SD; maintain HOLD, TP S$4.18.



Maintain HOLD TP revised to S$4.18. 

  • We maintain our Hold recommendation as we believe the current share price has factored in the positive prospects. Valuation for the stock is currently priced at a < 4% dividend yield (which is -2SD of its 3- year mean) and +2SD of its 4-year mean PE of 19.4x. 
  • Our TP is raised to S$4.18 on higher FY18F earnings as we revised up our assumption on passenger and flights handled.


4Q16 results in line. 

  • 4Q16 net profit ended at S$50.7m (-1.7% y-o-y) while revenue was S$417.6m (-1.8% y-o-y). The dip in 4Q net profit arose largely from lower contribution from its food catering JV/Associates. 
  • Recovery in aviation traffic and volumes were dampened by lower overall pricing in the form of higher LCC contribution. While traffic statistics had improved, growth parameters including passengers handled, meals served, and flights handled outstripped revenue growth in their respective segments, implying lower pricing on services rendered.


Lift FY18F earnings by 5%. 

  • Our projected earnings growth of 9% for FY17F is on the back of a recovery in aviation traffic and higher margins on a full 12 months' impact from the disposal of low-margin Urangan Fisheries into SATS BRF. 
  • We have also imputed higher FY18F margins due to automation and lifted earnings by 5%.


Valuation:

  • Blended DCF model and PER valuation methodology. Both valuation matrices account for stable predictable cash flows and potential earnings growth. Our TP, which is based on the average of discounted cash flow (DCF) valuation (7.5% weighted average cost of capital and 2% terminal growth assumption) and price-earnings valuation pegged to peer average 19x FY17F earnings, is S$4.18.


Key Risks to Our View:

  • SATS could see further earnings and TP upside through stronger-than-expected recovery at Changi and regional aviation traffic; and recovery in demand for full-service carriers leading to higher uplift for aviation food solutions pricing.




Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-26
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 4.18 Same 3.65


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