SATS Ltd - Phillip Securities 2016-07-22: Bottom-line growth driven by cost-discipline

SATS Ltd - Phillip Securities 2016-07-22: Bottom-line growth driven by cost-discipline SATS LTD S58.SI 

SATS Ltd - Bottom-line growth driven by cost-discipline

  • S$424mn revenue exceeded consensus expectations of S$411mn by 3.2%, and exceeded our expectations of S$402mn by 5.5%.
  • S$55.5mn adj. PATMI in line with consensus expectations of S$56.0mn, and exceeded our expectations of S$53.2mn by 4.3%.
  • TFK Corp. turned a corner and was profitable this quarter.

TFK Corp. turned a corner and was profitable this quarter

  • Management attributed this to higher revenue and restructuring efforts. 
  • Overall, revenue was 36.2% higher y-o-y to S$48.6mn. 
  • The higher revenue was due to contribution from the Delta Air Lines contract and the strengthening of the JPY. SGD had depreciated 12.2% y-o-y relative to JPY in 1QFY17. Average JPY/SGD exchange rate during 1QFY17 was 79.50, compared to 90.37 in 1QFY16. 
  • There was a corresponding increase in staff costs at TFK Corp to handle the higher volume. Restructuring efforts to reduce redundancies contributed to the profitable quarter. 
  • We believe that TFK Corp has turned a corner and are expecting it to remain profitable. TFK would continue to benefit if JPY continues on its appreciation path.

No price war at Changi Airport

  • Disputing recent media reports, Management asserted that while competition is intense, there is no price war going on at Changi Airport. 
  • Management maintained that SATS competes on quality and not on pricing.

Elevated capital expenditures, in line with strategy of automation

  • Capital expenditure in 1QFY17 was S$19.5mn compared to S$5.9 in 1QFY16. 
  • Management share that the capital expenditure was for both the Gateway Services and Food Solutions business segments. 
  • For the Gateway Services segment, SATS has invested in machinery used for mailbag sortation at their e-commerce facility at Airfreight Terminal 1 (AFT1). The machinery will increase current volume by four times. 
  • For the Food Solutions segment, SATS has invested in Autonomous guided vehicles (AGVs) and ultrasonic dishwashing equipment. The Group has also invested in energy efficient equipment that would lead to less energy consumption and consequently lower fuel cost expense.

Maintain at "Neutral" rating, with higher target price of S$4.24 (previous: S$4.17)

  • Positive surprise in the quarter came from the turnaround for TFK Corp. 
  • We raise our FY17e/FY18e recurring PATMI estimates upwards by 6.8%/9.1% from our previous estimates. 
  • Our target price of S$4.24 represents an implied forward P/E multiple of 20.0x FY17e EPS. (5-year historical P/E multiple is 17.3x)

Premium over historical valuations

  • SATS is currently trading at more than one-standard deviation above the historical P/E multiple of 17.3x and the historical EV/EBITDA multiple of 12.3x. We believe that positives for SATS have already been priced in.

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-07-22
Phillip Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 4.24 Up 4.17