SATS - Maybank Kim Eng 2016-05-18: Stretched valuations; D/G to SELL from HOLD

SATS LTD S58.SI

SATS (SATS SP) - Reality Check

SATS’s share price outperformed the market and its sector peers over the past year as investors priced in the prospects of strong EPS growth in FY16.
Given this massive outperformance, we believe investors need to do a reality check on valuations now. At 21x forward P/E, the stock is near its historical peak and looks rich against the moderating EPS growth profile in the years beyond.
While we continue to see earnings growth and raise our EPS by 3-4%, we struggle to justify its lofty valuation.
TP raised to SGD3.86 (from SGD3.82), as we roll forward to 17x FY3/18E P/E (from 18x FY3/17E P/E), 0.5SD above historical mean for its decent EPS growth.
However, our rating is cut to SELL on stretched valuations.

SATS will announce 4Q16 results on 23 May and we expect core net profit of SGD64.2m (+24.5% YoY).
We believe TFK Corp will report a positive set of results on incremental contribution from its contract with Delta, which started in Oct 2015, and a stronger JPY against the SGD.
We also expect better performance from its Singapore operations on higher workload (Unit Services: +14.5% YoY) from the return of Jetstar. It should also book an exceptional gain of SGD9m from the sale of a property.

While SATS is well-positioned to benefit from improving air traffic trends at Changi Airport, we believe the pace of earnings growth will slow to just 3-4% in FY17-18. This is a marked deceleration from the 20% growth in FY16.
We doubt the strong margin expansion in FY16 from the de-consolidation of its low-margin food distribution business to its JV with BRF can be repeated.
Furthermore, current cost relief from lower airport charges will expire on 31 Mar 2017.
It is also important to note that while the recent ratification of the ASEAN Open Skies agreement is positive, infrastructure constraints will limit traffic upside in the medium term.

At EV, adj. to FY16 EBITDA of 14.1x, SATS is trading at almost 30% premium to the recent sale of Swissport by PAI to HNA Group.
According to Moody’s Investors Services, Swissport was sold on 30 July 2015 for an Enterprise Value of CHF2.7b, which implies 10.9x LTM Jun-15 EBITDA.

Higher-than-expected growth in air traffic.
Inorganic growth from acquisitions.
Higher dividend payout. Payout ratio had been capped at 80% despite large cash hoard. Upside to payout is possible to drive efficient use of capital.

Stagnant or contraction in air traffic.
Poor execution from new acquisitions. For example, earnings drag from its recently acquired 34% stake in Brahim’s inflight catering business.
Market expects margins and EPS to rise as the company drives scale across the group. Inability to contain cost increase could lead to disappointment.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-18

Maybank Kim Eng SGX Stock Analyst Report SELL Downgrade HOLD 3.86 Up 3.82