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

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.

Steady gateway revenue with steady Changi volume

  • 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.

Japan turnaround helped food solutions

  • 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.

Staff cost pressure

  • 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’ steady contribution

  • 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.

Maintain Add but lower target price to S$4.57

  • 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