SATS Ltd - CIMB Research 2017-05-17: Stretching The Limit

SATS Ltd - CIMB Research 2017-05-17: Stretching The Limit SATS LTD. S58.SI

SATS Ltd - Stretching The Limit

  • SATS will release its 4QFY3/17 results on 19 May. We expect SATS to report 4QFY17 net profit of S$60m-63m and final DPS of S$0.11.
  • To sustain its 23x FY18 P/E valuation or +2.5 s.d. of 5-year mean, SATS needs to achieve at least 10% EPS growth in FY18F, which we believe may be a stretch.
  • Our target price is raised to S$5.17, still based on blended valuations of DCF and P/E (19x), to incorporate our EPS tweak from lower cost assumptions.

Changi passengers and flights steady, cargo high in Mar 17 

  • SATS may deliver steady 4QFY17 revenue of S$440m-450m and net profit of S$60m- 63m. 
  • Revenue could be supported by strength in gateway as cargo tonnage was higher yoy as trade volumes rose in East Asia, Europe and the Americas. 
  • Cargo handled in Changi grew 6.2% yoy, boosted by +10% yoy in Mar. SATS’s ground handling business is still firm as flights and passengers handled in Changi airport grew 1.9% and 4.6% yoy in 1QCY17. Better cargo could lift EBIT margin as it is less labour intensive.

TFK should remain strong with stronger Yen 

  • Yen strengthened against S$ by c.4% qoq. This could lead to a stronger translation of Japan’s revenue. 
  • Overall tourist arrivals into Japan grew by 7.7% qoq in 1QCY17. This should see firm volumes for TFK’s operations, assuming SATS does not lose any market share (c.40-50%).

It is crucial for associates to keep up their momentum 

  • We expect 4QFY17 associates earnings of S$14m (+14% qoq, 24% yoy) if ASEAN’s 9MFY17 airfreight momentum is maintained. 
  • Hong Kong cargo landscape may still be competitive. Maldives should be firm with the return of more European tourists.
  • Overseas associates’ growth is key to SATS’s growth given the limited single-digit growth that can be achieved in Singapore.

Driving down cost was the key re-rating factor in past two years 

  • SATS has re-rated in the last two years, due to its inclusion in the FSSTI and double-digit earnings growth, in our view. 
  • In FY16, the deconsolidation of food distribution business and licensing fee rebate led to 13% yoy earnings growth, although its revenue fell 3%. 9M17’s 13% yoy earnings growth was due to higher sales from Delta’s contract in Japan, cargo strength and some raw material cost savings mainly on weaker currencies (Yen, Real). 
  • EBIT margin grew from 12.6% in FY16 to 14.2% in 9MFY17.

Hard to keep up the double-digit earnings growth beyond FY17 

  • For FY18-19F, we are factoring in c.6% p.a. revenue growth on sustainable Changi volume increase. 
  • We lower assumptions for raw materials, company accommodation & utilities and others, assuming SATS is able to keep up with its efforts to control costs and benefit from favourable currency effects. 
  • Our EBIT margins for FY18-19F are lifted to 14.4% and 14.6%, respectively (prev. 13.7% and 14.4%). 
  • Our EPS is tweaked higher by 2-4% for FY18-19F. Even after these, our projected earnings growth is only 7-8%.

Trading at +2.5 s.d. of 5-year mean 

  • The stock is trading at stretched valuations of 23x FY18 P/E, leaving little room for disappointment. Recent share price strength could be due to rotation into YTD index laggard as SATS had underperformed the FSSTI. 
  • We see opportunity to trim some profits post results and dividend announcement. 
  • Re-rating catalysts could come from stronger-than-expected cost cutting measures or sizeable M&As. 
  • Key risk is a general slowdown in air traffic within Asia. 
  • Maintain Hold.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-05-17
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 5.17 Up 5.000