SATS Ltd - CIMB Research 2016-07-22: Japan turnaround

SATS LTD S58.SI

SATS Ltd - Japan turnaround

1QFY17 core net profit was in line at 22% of our FY17F and 23% of consensus.
SATS maintained its market share in Changi and achieved steady revenue from gateway services. TFK was profitable in 2QCY16, thanks to Delta’s contract.
TFK turned profitable but overall margin pressure kicked in with higher staff costs.
Balance sheet remained strong with net cash of S$444m (US$326m).

Maintain Add but target price cut, still based on blended DCF (WACC 7.6%) and 19x CY17 P/E. Re-rating catalysts could be stronger Changi data and sizeable M&As.

Changi’s passengers and flights data for Apr-May 16 grew at an average of 7.9% yoy and 4.2% yoy, respectively, resulting in steady revenue for gateway of S$183m (US$135m). Competition remained stiff in Singapore but SATS said that market share was maintained (c.80%).
However, we believe ASP remained subdued, with more LCC growth and yield pressure from long-haul and premium travelling.
SATS will no longer disclose operating statistics from 1Q17 and report regional statistics instead in 2Q.

Revenue from Japan grew 11% qoq and 36% to S$66m (US$49m), thanks to stronger contribution from Delta’s contract and favourable yen translation. This lifted overall food solutions revenue to S$240m (US$176m).
Japan’s contribution inched up to 15.6% of group compared to an average of 13% in FY16. TFK was profitable in 1Q17.

The 1Q17 EBITDA margin of 17% was below our expected 18%. The staff cost-to- revenue ratio of 50% was higher than our projected 48.5%. SATS has been ramping up manpower hiring to cater to Delta’s and AirAsia’s contracts. Although hiring is almost completed, margin effects will only flow through from 2Q17.
We now forecast a lower EBITDA margin of 17% on higher staff costs.

Associates contributed a steady S$12.2m (US$9m) in 1Q17 or 22% to SATS’s core profit.
Gateway associates grew 16% qoq, offset by a 33% drop in food solutions on the back of the dilution of Beijing Airport Inflight Kitchen.

Net cash stood at S$444m (US$326m), with strong operating cash flows of S$76m (US$55m) and FCF of S$66m (US$48m).
We cut our EPS by 5-7% due to lower projected margins. Our target price is reduced accordingly (S$4.57), still based on a blend of DCF (WACC: 7.6%) and 19x CY17 P/E.
Downside risks to our call include a sudden decline in the Chinese and ASEAN economies and terrorist attacks.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-07-22

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 4.57 Down 4.61