SATS Ltd - CIMB Research 2016-08-30: Priced for perfection

SATS Ltd - CIMB Research 2016-08-30:  Priced for perfection SATS LTD S58.SI

SATS Ltd - Priced for perfection

  • Singapore 1H16 tourist arrivals of 8.2m did not surpass our base case expectations, at 49% of our annualised target of 16.2-16.5m (+7 to 8% yoy).
  • SATS’ ranking as high-yield stock dropped from no.4 in Apr 16 to no.8 in Jul 16, with dividend yield of 3.2%, below the market average of 3.8%.
  • We have priced in margin increase to include Japan’s turnaround, after the transition period of Delta’s contract materialises in FY3/18 and higher grant in Singapore.
  • We downgrade SATS from Add to Hold as we think the positives have been priced in. The stock trades at 22x forward P/E, more than 2 s.d. above its long-term mean.

YTD tourist arrivals in line 

  • Tourist arrivals increased 12.5% yoy in Jan-Jun 16, with the 8.2m tourists entering Singapore forming 49% of our 2016 expectation of 16.2m-16.5m. The number of Chinese tourists coming to Singapore was still healthy at c.241,000 per month in 2Q16 versus 249,000 in 1Q16, although yoy growth rate has slid from the YTD peak of 84% in Mar 16 to 53% in Jun 16. 
  • We believe yoy growth in 3Q16 could narrow to c.30% due to the high-base effect in summer months (average 257,000 in Jul-Aug 15).

FY17 dividend yield lower than market average 

  • We still expect FY17 DPS of S$0.16, backed by net cash and earnings growth.
  • However, SATS was ranked no.8 in Jul 16 (vs. no.4 in Apr 16) among the high-yield, non-REIT, net cash companies. Its FY17 yield of 3.3% is also below Singapore average market yield of 3.8%. 
  • We advise investors to switch to other big caps such as Venture Corp and ST Engineering for yield plays.

Margin expansion priced in 

  • Operating margin in 1Q17 was 12.8% (4Q16: 11.9%, FY16: 12.6%). There could be staff cost pressure in 2Q17 as SATS has been ramping up manpower hiring to cater to the Delta and AirAsia contracts. 
  • Looking at other Singapore companies that invest heavily in innovation such as STE, we note that government grants amounted to S$6m-11m p.a. in FY12-15 (partly backed by defence contracts). SATS may be a beneficiary, given its automation capex but we have priced in FY17-18 EBIT margin expansion of c.13.3%.

Zika threat may not be as bad as SARS 

  • The Zika outbreak is not as bad as SARS, in our view. The number of Zika cases in Singapore has risen to 82 but at least 40% of those infected have recovered.
  • Hospitalisation is common but deaths are rare, according to Ministry of Health. However, if the situation worsens in Indonesia, Thailand, Vietnam and the Philippines (labelled by WHO as countries with “possible endemic transmission of Zika), Singapore tourism may be affected as ASEAN countries are usually packaged as “one” destination.

Downgrade to Hold 

  • We raise EPS by 1-2% for FY17-19 to account for higher EBIT margin for FY17-18. As such, our target price is raised to S$4.64, still based on blended DCF and 19x CY17 P/E valuations. However, we downgrade SATS to Hold as we think the positives of tourism boost and margin expansion have been priced in
  • De-rating catalysts are worsening Zika infection in the ASEAN region and earnings disappointment from staff cost pressure.
  • SATS traded at 10x forward P/E in 2003 during SARS epidemic. Upside risk could come from earnings accretive M&A.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-08-30
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.64 Up 4.570