SATS LTD
S58.SI
SATS - 2QFY17: Earnings In Line; Raises Interim Dividend
- 2QFY17 results were in line. With SATS raising its interim dividend to 6 S cents (1HFY16: 5 S cents), we raise our FY17 final dividend by 2.6% to 12 S cents. This implies a total payout of 18 cents and dividend yield of 3.8%.
- Going into FY18, Terminal 4 is unlikely to lead to a sharp increase in headcount but we are uncertain of the degree of operating leverage. In addition, we believe the street has not factored in the possibility of a hike in airport-related fees as T4 commences operations.
- Maintain HOLD. Target price: S$4.50. Suggested entry price: S$4.25.
RESULTS
Earnings in line; raises interim dividend to 6 S cents (1HFY16: 5 cents).
- SATS’ 1HFY17 net profit amounted to 53% and 52% of our and consensus full-year net profit estimates respectively.
- SATS also declared a higher interim dividend of 6 S cents and reiterated its policy of sustainable increases in dividend.
- Operating margin improved 0.5ppt yoy to 14.5% but SATS attributed the bulk of the improvement in margins to the deconsolidation of SAT-BRF.
Gateway services revenue rose 3.4% yoy, in line with Changi flight movements growth of 3.3%.
- This suggests that the commencement of the AirAsia contract in July did not result in a material improvement in top-line despite the incremental volume.
Increase in food solutions revenue was mainly due to stronger TFK revenue (+34% yoy).
- TFK’s revenue growth was driven by a stronger yen and incremental contribution from Delta Airlines. SATS indicated that half of the revenue growth was due to the stronger yen.
- Meanwhile, in-flight catering revenue excluding TFK fell 0.9% yoy. SATS did not disclose the quantum of unit meals handled at Changi, but we reckon the decline could be due to:
- lower quantum of higher-value meals, or
- weaker pricing.
Profits from associates and JVs declined for four straight quarters despite the inclusion of SATS-BRF as a JV.
- In 2QFY17, contribution from associates and JVs declined 3% yoy, mainly due to weaker contribution from gateway services while food solutions’ associate income was flat.
Operating cash flow (OCF) excluding working capital changes rose 15% yoy in 2QFY17.
- Coupled with an increase in capex, this resulted in a 10% rise in FCF.
STOCK IMPACT
T4 unlikely to lead to a substantial increase in headcount, but we are uncertain of the degree of operating leverage.
- Changi Airport’s Terminal 4 (T4) will see a full rollout of FAST initiatives, which involve self-check in, and thus reduce the need for pax handling. Given that pax handling has not been accretive, operating margins could improve. However, management was non-committal when queried on margin accretion.
- In addition, we believe the street has not factored in the possibility of a hike in airportrelated fees as T4 commences operations.
A decline in disclosure standards.
- In a departure from previous practices, SATS provided group operating statistics which combined data from Hong Kong and Japan subsidiaries. The lack of specific data from Singapore operations along with unit services and meals has made it harder to accurately evaluate and project earnings.
EARNINGS REVISION/RISK
- We raise our FY17 net profit estimate slightly by 2.7% as we factor in more flights handled and lower raw material costs.
- We also raise our FY17 final dividend assumption by 2.6% to 12 cents, following the increase in interim dividend. Thus, total dividend is expected to rise by 3 cents to 18 cents, implying a dividend yield of 3.8% at current levels.
VALUATION/RECOMMENDATION
- Maintain HOLD with a marginally higher target price of S$4.50 (previously S$4.45).
- We continue to value SATS on a DDM basis (required return: 6.3%, g: 1.4%). Our target price implies FY17F dividend yield of 4.0%. Suggested entry price is S$4.25.
SHARE PRICE CATALYST
- Improving margins, and more flights and meals handled.
K Ajith
UOB Kay Hian
|
Sophie Leong
UOB Kay Hian
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http://research.uobkayhian.com/
2016-11-11
UOB Kay Hian
SGX Stock
Analyst Report
4.50
Up
4.450
