SATS Ltd - CIMB Research 2016-11-10: Currency play

SATS LTD S58.SI

SATS Ltd - Currency play

2Q17 net profit of S$62m (-3% qoq) in line with expectations. 1H17 core net profit of S$118 at 51% of our and 48% of Bloomberg consensus full-year forecasts.
Delta contracts in TFK Japan and strengthening yen were key to revenue growth.
1H17 EBIT margin of 13.7% slightly above our forecast of 13.2%.
Interim DPS of S$0.06 was declared (1H16: S$0.05). Net cash stood at S$333m.

Our FY17F DPS stays at S$0.16 (+7% yoy) in line with the EPS growth.
Maintain Hold with a higher target price (S$4.95), based on blended DCF (WACC 7.6%) and the roll over to 19x CY19F P/E.

Group revenue grew 3% qoq and yoy to S$439m, thanks to stronger topline from Japan.
Delta contracts in TFK and stronger yen (+5% qoq) lifted Japan revenue by 7% qoq to S$71m. Singapore revenue was flat qoq at S$343m, despite 1.5-1.9% qoq growth in Changi’s flights and passengers.

SATS revised its operating statistics disclosure, combining aviation and non-aviation data for Singapore and overseas operations.
Overall passengers handled rose c.10% yoy in 2Q to 25.18m and flights handled increased 7% to 83.88m. This reflected the trend of increasing air travel through Singapore and Hong Kong airports.
Gross meals output rose 11% yoy to 34.2m, thanks to Delta’s volume in Japan.

We believe the qoq improvement in EBIT margin to 14.2% (2Q16: 13.1%) was partly due to higher translated revenue.
Total opex rose 1.4% qoq to S$375m. Staff costs was lower by 1.5% qoq but management indicated it still expects a slight upward trend for FY16, as more skilled personnel are hired to operate ‘automation’. We forecast a 2% annual increase in staff costs.
Deprecation rose 6% yoy and 2% qoq to S$18m in 2Q as SATS continued to invest in automation.

SATS is a long-term growth story, in our view. The opening of Changi's Terminal 4 may not see an immediate surge in operating statistics as only AirAsia and Cathay Pacific are moving over to the new terminal. The partnership with SingPost in airmail consignment handling services could leverage on the SingPost-Alibaba ecommerce linkage.
Cargo volume could see some uplift from Amazon’s presence in Singapore. The partnership with Wilmar to build a kitchen near Shanghai could also contribute in the long run.

Management guided that final DPS will track 2H17's performance.
We see little upside to our S$0.16 FY16F DPS unless volume growth surprises. We believe SATS’s current valuation of 21x forward P/E (1 s.d. above 10-year mean) is fair on the back of its 7% earnings growth p.a.
Re-rating catalysts for the stock could come from stronger-than-expected margins and Changi volume.
Key risk is a general slowdown in air traffic within Asia.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-11-10

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 4.95 Up 4.640