SATS - UOB Kay Hian 2016-07-22: 1QFY17 Good Start To The Year; TFK Turns Profitable

SATS - UOB Kay Hian 2016-07-22: 1QFY17 Good Start To The Year; TFK Turns Profitable SATS LTD S58.SI 

SATS (SATS SP) - 1QFY17: Good Start To The Year; TFK Turns Profitable

  • SATS’s 1QFY17 results were in line. 
  • Operating margin rose 2.3ppt yoy, likely due to TFK’s reversal to the black, the resumption of the JetStar Asia contract and a decline in opex. 
  • Meanwhile, increased automation, which could see higher capex but reduced reliance on manpower, could lead to higher operating leverage. 
  • In addition, four US airlines were recently granted daytime slots at Haneda Airport, which could boost TFK’s revenue from Oct 16. 
  • Maintain HOLD with a higher target price of S$4.45. Suggested entry price: S$4.00.


Underlying earnings in line; operating margin likely boosted by TFK and gateway services. 

  • SATS’ 1QFY17 underlying net profit was 24% of our full-year core net profit forecast. 
  • Included in the results was a S$9.3m gain from the sale of 22 Senoko Way. We had already factored this gain in our model. 
  • However, SATS also recognised a S$0.5m loss on partial disposal of Beijing Airport Inflight Kitchen (BAIK) following a dilution in its stake as well as a S$0.2m loss on disposal of an associate. 
  • Operating margin improved 2.3ppt to 12.8%. We believe this could be due to: 
    1. a 36% yoy increase in revenue from TFK, 
    2. resumption of Jetstar’s ground handling contract, and 
    3. a 0.9% yoy decline in opex.

Excluding the deconsolidation of SATS-BRF, underlying revenue would have risen 8.6% yoy. 

  • This in turn suggests that food solutions revenue ex-TFK would have risen 5% yoy. 
  • While SATS did not provide data on unit meals for the quarter, extrapolating Changi Airport’s pax throughput growth of 7.9% for April and May suggests continued pricing pressure for inflight catering operations.

TFK’s 36% yoy revenue growth driven by incremental contribution from Delta Airlines. 

  • TFK started supplying to Delta two quarters ago, but managed to make meaningful contribution only this quarter. The 36% yoy rise in revenue reflects higher volume as well as a stronger yen. 
  • Assuming a third to half of the incremental revenue flowed through to bottom line, SATS’ 59% stake in TFK could have contributed to S$2.9m-4.4m of the S$8.4m increase in core net profit.

The 7% yoy increase in staff cost was offset by lower raw material and utilities costs. 

  • Part of the increase in staff cost was due to ramp-up in operations at TFK as well as additional manpower ahead of AirAsia Bhd’s ground handling contract which commenced in Jul 16.
  • Associate and JV contribution declined 5% yoy, mainly due to the dilution of its stake in its Beijing food solutions associate BAIK from 40% to 28%. Meanwhile, income from gateway associates saw a healthy growth of 2% yoy.

Operating cash flow (OCF) excluding working capital changes rose 19% yoy in 1QFY17. 

  • However, FCF excluding working capital changes fell 5% yoy due to a steep rise in capex.


Investment in automation could reduce reliance on manpower and lead to improved operating leverage. 

  • In 1QFY17, capex rose by S$13.6m as SATS invested in automation and an e-commerce mail back facility. SATS cited examples such as dishwashers which will reduce the reliance on labour, as well as more energy-efficient chillers which also contributed to the decline in utilities expenses. 
  • SATS intends to replace staff with automation, which could increase its operating leverage amid wage pressures and potentially boost earnings growth.

The approval of daytime flights for US carriers at Haneda airport would likely lead to increased pax throughput and higher meal volumes for TFK. 

  • The Japanese government and the US Department of Transport recently concluded an agreement which would enable US carriers to operate daytime flights at Haneda Airport. Four US carriers, including Delta Airlines, were granted daytime slots at Haneda from 30 Oct 16. 
  • With incremental flights and meal volumes, this could lead to higher operating leverage and improved profitability for TFK.


  • Minimal changes to our earnings estimates. We have factored in the S$0.7m loss in divestment and dilution of associates.


Maintain HOLD with a higher target price of S$4.45. 

  • In line with UOBKH’s lower risk free rate assumption of 2.5% (previously 3%), we raise our fair value by 6% to S$4.45. 
  • We continue to value SATS on a DDM basis (WACC: 6.3%, g: 1.4%). 
  • Our target price implies FY17F dividend yield of 3.8%.


  • Improving profitability at TFK, higher ASP and improving margins.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-22
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 4.45 Up 4.20