SATS Ltd - CIMB Research 2017-05-19: Cash Rich, Need More Inorganic Gains

SATS Ltd - CIMB Research 2017-05-19: Cash Rich, Need More Inorganic Gains SATS LTD. S58.SI

SATS Ltd - Cash Rich, Need More Inorganic Gains

  • 4Q17 core profit of S$51.6m was a slight miss against our expectations due to a lower EBIT margin of 10.8% vs. our expected 14%. DPS of S$0.11 was spot on.
  • The disappointment in margin was due to lower revenue from Japan and higher staff costs as some subsidy schemes expired.
  • SATS expects lower margins in FY18, as franchise fee rebate expires in Apr 17. In addition, pricing pressure from airlines (mainly SIA) may curb significant growth.
  • SATS is a long-term play on Asia’s aviation traffic volume and Changi throughput.
  • However, we still think its valuation is lofty against lacklustre core earnings growth.

More tricks from the hat 

  • 4Q17 reported profit of S$66.6m was in line, thanks to a S$15m negative goodwill from the increased stake in Taiwan Evergreen Sky Catering Corporation (ESCC) from 15% to 25%. 
  • The equity accounting of ESCC (previously classified as long-term investment) also improved food solutions associates profit by c.S$2m yoy in 4Q17. 
  • In FY18, pending fulfillment of certain conditions precedent, SATS may recognise S$11m in gains from the deconsolidation of SATS HK and a lower stake in Asia Airfreight Terminal (AAT).

SATS guides down margins 

  • Despite the strength in the yen, TFK revenue in 4Q17 dipped 5% qoq to S$59.5m. 
  • SATS said the previous quarters’ growth had been faster-than-expected and this will be the new norm. 
  • Staff costs formed 51% of revenue (9M17 average was 49%) due to lower subsidy in Singapore (wage credit scheme from 40% to 20% and different tiers of special employment credit). 
  • The expiry of franchise fee rebate for catering and ground handling from Apr 17 add c.S$15m of costs from FY18, compromising margins ahead.

Deconsolidation of SATS HK may buffer 

  • The deconsolidation of SATS HK from a subsidiary to an associate (49%) will reduce SATS’ revenue by S$45m (minimal profit) and may help to buffer the expected lower margin in FY18. 
  • We adjust our EBIT margin to 13.4% (FY17:13.3%) from 14.4% to account for higher license fee, and lower costs from SATS HK ground handling.

China safe food progressing with three customers 

  • SATS Yihai Kerry, the partnership with Wilmar to supply safe food in China has made good progress with its first kitchen in Kunshan. The kitchen has acquired three customers since Mar 17 and is expected to contribute more meaningfully from FY20.
  • The safe food that SATS Yihai Kerry focuses on is mainly the supply of food components (sauces, toppings) for food chains and restaurants.

Cash-rich operator but dividend may be capped 

  • Cash balances crossed S$500m, with net cash at S$398m. The additional 2Scts increase in DPS in FY17 is in line with the double-digit earnings growth. Unless SATS is able to crystalise more non-core gains to improve the bottom line and ROE, we believe dividend growth could also be capped. 
  • The opening of Terminal 4 is unlikely to see a steep pick-up in volume in the next one year but gradually improve in the medium term.

Maintain Hold 

  • Our EPS is adjusted lower by 3-8% for FY18-20F. Accordingly, our target price is cut to S$5.11, still based on DCF (adjusted for higher cash) and 19x P/E. 
  • Re-rating catalysts could come from stronger margins. We would trim some position given the lofty valuations (23x FY18F).

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-05-19
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 5.11 Down 5.170