SATS Ltd - CIMB Research 2016-05-24: Feeding and connecting Asia

SATS Ltd - CIMB Research 2016-05-24: Feeding and connecting Asia SATS LTD S58.SI 

SATS Ltd - Feeding and connecting Asia 

  • FY16 NP broadly in line with consensus and ours at 95% of our FY16 forecast. 
  • Strength from Changi benefited gateway services more than food solutions. 
  • Cost savings efforts paid off as EBITDA margin met our expected 17%. 
  • Net cash stood at S$381m with final DPS at S$0.10. Total DPS of S$0.15 exceeded FY15’s S$0.14, albeit at a lower payout of 75% (FY15:79%)
  • SATS to benefit from Changi’s long-term volume growth, as the airport strives to stay competitive as an ASEAN aviation hub. Maintain Add and target price. 

Strength in Changi benefits gateway more than food solutions 

  • 4Q16 revenue of S$418m (US$30m) dropped 5% qoq and 2% yoy mainly to account for seasonal weakness. 
  • Gateway’s revenue remained stable qoq at S$184m (US$133m) thanks to strength in Changi’s passengers and flights volume in 4Q16, offset by weaker cargo. 
  • Food solutions’ revenue (55% of SATs’ revenue) dipped 7% qoq in 4Q16 vs. overall unit meals produced (-3% qoq). 
  • We believe pricing pressure from full-flight carriers should continue as airlines are seeing compressed yields. 

Cost savings effort paying off 

  • FY16 EBITDA margin of 16.8% met our target 17%. 
  • Staff costs grew 3.2% yoy to S$826m (US$598m) which we find an acceptable pace. 
  • Raw material costs slid to S$279m (US$202m) in FY16, comprising 16.6% of revenue vs. 20% in FY15. 
  • Other costs (transport, fuel and warehousing) comprised 7.6% of revenue vs. 8.8% in FY15, benefitting from deconsolidating its food distribution arm to BRF JV. 
  • Lower power prices in Singapore and rebates from Changi Airport saved on utilities and licensing fees. 

Associates steady, TFK benefited from Delta but still not profitable 

  • Share of profits of associates remained steady yoy at S$48m (US$35m), fuelled by growth in Beijing Airport Inflight Kitchen and firm volume contribution from Maldives Inflight Kitchen and PT Jas/Cas. AAT is still under pressure from overcapacity in Hong Kong cargo terminal. 
  • SATS’ Japanese subsidiary TFK’s revenue was steady qoq at S$60m (US$43m) thanks to Delta’s contract that started in 3Q16. However, the division is still not profitable due to high staff retention costs. 

Aviation traffic proxy 

  • 84% of SATS’ FY16 revenue are dominated by aviation industry. With its presence in 45 airports in 12 countries (as of Mar-16), SATS’ multiple touchpoints and connectivity benefit from inter-Asia air-traffic growth. Key drivers include 
    1. increasing LCCs travel, 
    2. steady transit volume through Singapore (c. 50% of Changi’s traffic) and 
    3. new terminal expansion in Changi. 
  • SATS have won the gateway services contract from AirAsia to sustain its volume in the new Terminal 4 (to be completed by CY17). 

Strong balance sheet, positive FCF 

  • Net cash stood at S$381m (US$276m) with FCF at S$222m (US$161m). We tweak our EPS by 2% for FY17 and FY18 to account for lower food solutions growth. 
  • We see price weakness as an entry opportunity. We maintain our Add call and target price of S$4.61, still based on blended DCF (WACC: 7.6%) and 19x CY17 P/E
  • Catalysts could come from stronger Changi data and sizeable M&As. 
  • Downside risks to our call include sudden decline in Chinese and ASEAN economy and terrorists attack.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-05-24
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 4.61 Same 4.61