SATS LTD.
S58.SI
SATS Ltd - Growth Has Been Priced In; Wait For Better Entry Point
- FY17 revenue in line with our forecast and consensus expectation
- FY17 underlying PATMI missed our forecast by 3.6%, and missed consensus expectation by 4.0%, as 4Q17 underlying PATMI was dragged down by higher costs
- Final dividend rose to 11 cents (our forecast: 10 cents) from 10 cents in FY16 Total ordinary dividends of 17 cents for FY17, higher than 15 cents from last year.
FY17 margin and profit was dragged down in 4Q17
- FY17 EBIT margin of 13.3% was better than the 12.6% achieved in FY16. However, there was YoY weakness in 4Q17 EBIT margin of 10.8% from 11.9%. This was in contrast to the first three quarters of FY17, which experienced YoY higher margin that was driven by the deconsolidation of the lower-margin food distribution business to the SATS BRF joint venture.
- 4Q17 operating cost was higher due to a few factors – higher wage pressure (due to service increment and lower government subsidies), higher company premises and utility expenses (due to non-renewal of rebates by Changi Airport Group) and higher other costs.
- Consequently, 4Q17 underlying PATMI was only 1.8% YoY higher. (9M17 underlying PATMI was 9.1% YoY higher.)
Associates received a $15 million boost in 4Q17
- FY17 headline spike of 36% YoY in associates/JV profits was due to a $15 million negative goodwill recognised in 4Q17. SATS now holds a 25% stake in Evergreen Sky Catering Corporation (ESCC) after acquiring a further 10% stake.
- The stake in ESCC has now been reclassified from long-term investment to an associate; and the negative goodwill was a result of deemed increase in value of the original investment.
- Share of profit of associates/JV growth would have been flat at 1.0% YoY, in the absence of this item.
Maintain "Neutral" rating, with higher target price of S$5.08 (previous: S$4.73)
- SATS Ltd (SATS) has been growing both organically and inorganically. Our price target gives an implied FY18e forward P/E multiple of 23.2x.
- We are upbeat on the long-term growth for SATS, but we find valuations unattractive at current level. Investors should look to accumulate on price weakness.
Our narrative for SATS Ltd
- SATS will remain a regional food and aviation player, with organic revenue growth driven mainly by air traffic demand.
- Inorganic growth will mainly come from partnerships in businesses similar to existing ones, as well as adjacent business lines, resulting in investments in Associates & JVs.
- Capital reinvestment in technology to raise operating leverage and allow the company to scale up.
How our narrative connects to our valuation inputs
- Food Solutions revenue: Mid-single digit growth, slightly lower than Gateway Services, as Food Solutions revenue is a blend of the Aviation (faster growth) and Non-aviation (slower growth).
- Gateway Services revenue: Mid-single digit growth, in line with aviation demand, and slightly higher growth than Food Solutions.
- Aviation revenue: Near term aviation revenue muted at low-single digit growth, but reaching mid-single digit growth in steady state.
- Non-aviation revenue: Lower growth than Aviation revenue, at low-single digit growth that is in line with population growth, as this is mainly Food Solutions.
- Group revenue: FY18 Group revenue expected to be lower YoY because of sale of 4% stake in Asia Airfreight Terminal Company Limited (AAT) and 51% stake in SATS HK Limited (SATS HK). Management guided that the sales would be completed within the next two quarters. Impact to revenue would be ~$45 million, as AAT and SATS HK will be deconsolidated to associated companies.
- Margins: Slight erosion in operating margin in the near-term, but subsequently expanding, due to gains in scale through the use of technology and automation (operating leverage). Compression in operating margin offset by higher contribution from Associates & JVs, resulting in stable net profit margin.
- Associates & JVs: Increasing contribution to the bottom-line as more partnerships are formed. Cash being deployed into forming Associates & JVs, as reflected on the balance sheet and cash flow statement, with cash inflow from dividends.
- Capital reinvestment: Higher than historical average in the next two years, reflecting the push to add technology and automation, then normalising to slightly higher than depreciation.
Discounted cash flow intrinsic valuation
- We value SATS using a discounted free cash flow to firm (FCFF) model.
Richard Leow CFTe
Phillip Securities
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http://www.poems.com.sg/
2017-05-22
Phillip Securities
SGX Stock
Analyst Report
5.08
Up
4.730
