SATS Ltd - Phillip Securities 2016-05-24: Running ahead of fundamentals

SATS LTD S58.SI

SATS Ltd - Running ahead of fundamentals

4QFY16 revenue of S$417.6mn in line with consensus expectations of S$405.0mn, and in line with our expectations of S$417.0mn
4QFY16 PATMI, adj. of S$52.8mn missed consensus expectations of S$57.5mn by 8.2%, and missed our expectations of S$55.8mn by 5.4%
FY16 revenue of S$1.70bn in line with consensus expectations of S$1.71bn, and in line with our expectations of S$1.70bn
FY16 PATMI, adj. of S$222.7mn in line with consensus expectations of S$224.6mn, and in line with our expectations of S$224.0mn
10.0 cents final dividend proposed; higher than the 9.0 cents final dividend in FY15.

While we are optimistic over the long term prospects for SATS, the growth initiatives in place will take time to bear fruit. As such, we believe that valuation is currently stretched and has gotten ahead of fundamentals.
Our target price of S$4.17 represents an implied forward P/E multiple of 21.0x FY17e EPS, which in itself is also lofty, in our view.

Dividend payout ratio for FY16 is 75.4%; lower than previous years of FY15 80.0% and FY14 80.7%. Actual dividend per share is higher however – FY16 15.0 cents, vs. 14.0 cents in FY15 and 13.0 cents in FY14.
Management guided that dividend is not based on a payout ratio, but on a progressive and sustainable model, with yoy higher dividend per share.

SATS has a 60% equity stake in the food supply JV with Yihai Kerry Investments (YKI), a wholly-owned subsidiary of Wilmar International Limited. The JV is based in China, and will provide safe, high quality food.
Management shared that one of the challenges of providing high volume of food in China is the traceability of ingredients. YKI distributes commodities in China, and does not have experience in producing cooked food. YKI will bring to the table its existing logistics supply chain, range of customer base and relationships with the local Regulators, while SATS will bring to the table its experience and expertise in producing large volume of quality cooked food.
Management shared that a site for the first commissary kitchen has been identified, and construction will commence this year at a cost of about US$30mn. Construction is expected to take a year, and income is only expected to come in only in two years' time, in FY18. The pace in executing expansion plans into other Chinese cities will be dependent the on receptiveness of the first kitchen.

SATS had acquired a 49% equity stake in Brahim's Airline Catering Holdings Sdn Bhd (BACH), the main caterer at Kuala Lumpur International Airport (KLIA).
Management shared that the restructuring of Malaysia Airlines Berhad (MAB), had created a unique opportunity to enter a market which SATS previously did not have access to. Management expects volume at KLIA to grow.

SATS had entered into a 50:50 travel retail JV with DFASS (Singapore) Pte Ltd, named DFASS SATS Pte Ltd (DFASS SATS).
Management shared that DFASS has access to passengers through the sale of items via the buy-onboard model, while SATS has access to passengers at various touch-points before boarding and after disembarking the aircraft via their Gateway services model. The goal of the partnership is to expand on the buy-onboard model and enhance sales through other services such as collection and delivery of the items at other locations, instead of exclusively onboard the aircraft. DFASS SATS currently counts SIA, SilkAir and Scoot as its customers.

We observe that SATS is currently trading at more than one-standard deviation above the historical P/E multiple of 17.2x and the historical EV/EBITDA multiple of 12.2x. As such, we believe that valuations appear stretched, with risks of downside price movement for SATS.

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-05-24

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