SATS - Maybank Kim Eng 2016-05-30: Reality will set in

SATS - Maybank Kim Eng 2016-05-30: Reality will set in SATS LTD S58.SI 

SATS (SATS SP) - Reality will set in


Maintain SELL; Valuation lofty, EPS growth of 3-4% unexciting

  • SATS’s near-peak valuation of 20x P/E remains rich against the unexciting EPS growth outlook of 3-4%. 
  • When compared to the recent sale of Swissport to HNA Group, SATS’s adjusted EV to FY16 EBITDA of 13.4x is at a significant 23% premium as well. Hence, we continue to see downside to the stock even after the recent share price correction. 
  • We trim our FY17-18E EPS by 2-3% and lower our TP to SGD3.76 (from SGD3.86), based on an unchanged 17x FY18E EPS. 
  • Maintain SELL. The modest 3.8% yield is not appealing either.


Trim EPS by 2-3%; Limited upside to margins

  • We trim our FY17-18E EPS by 2-3% to incorporate higher costs, lower associates earnings and introduce FY19 forecasts. The strong EBIT margin expansion of 2.4ppt in FY16 was driven primarily by the deconsolidation of its low margin food distribution business to its BRF JV and we do not expect this to be repeated in the coming years. 
  • While improving air traffic could bring some margin upside from better scale of operations, we doubt further margin expansion will be significant. Hence, we expect EPS growth to decelerate significantly from the strong 13% seen in FY16.


Swing 


Factors Upside

  • 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.

Downside

  • 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/ 2016-05-30
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 3.76 Down 3.86


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