SATS Ltd - CIMB Research 2017-07-21: Breaking The Cycle Of Double-digit Yoy Growth

SATS LTD. S58.SI

SATS Ltd - Breaking The Cycle Of Double-digit Yoy Growth

SATS' 1QFY3/18 net profit of S$57m was broadly in line, forming 22% of our and consensus FY18F. Cargo revenue helped to counter the pressure in food solutions.
On a reported profit basis, this is the first major yoy decline, breaking its cycle of average double-digit yoy growth since 3Q15.

EBIT margin of 12.5% was below our 13.4% forecast, mainly from higher licence fee that crept up after the rebate from Changi Airport expired in Apr 17.
Associates, however, saved the day with stronger performances from Indonesia, India, China as well as the inclusion of Taiwan Evergreen Sky Catering.
Maintain Hold and target price of S$5.11, based on DCF and 19x P/E.

Food solutions revenue of S$233m (-2.9% yoy, flat qoq) was affected by lower volume from TFK as Delta and JAL ended some routes in Narita airport. Although there is a pipeline of new customers that could fill the gap, we think the oversupply of capacity in Tokyo could hinder market share gains by SATS.
Gateway revenue of S$193m (+6% yoy, flat qoq) was in line with Changi’s cargo and flights/passengers handled.

On a reported basis, SATS’s net profit declined by 11% yoy, breaking its cycle of delivering average yoy growth of c.14-18% since 3Q15.
The expiry of rebate from Changi Airport on licence fee (+35% qoq, +25% yoy) was the key culprit. However, cost control efforts continued to pay off as raw materials (16% of expense) improved 5% qoq and 7% yoy, partially due to lower volumes at TFK and benefits from economies of scale.

Profit contribution from associates was up 27% yoy and 12% to S$15.5m, largely from S$12m in gateway (+16% yoy, +29% qoq), in line with regional cargo volumes in Indonesia and India.
The increased stake in Taiwan Evergreen Sky Catering from 15% to 25% as well as the stronger performance in Beijing, China helped to lift associates’ food solutions profit contribution by 89% yoy to S$3.4m.

We believe subsequent quarters could see some improvement in reported profits from c.S$11m gains from the deconsolidation of SATS HK and a lower stake in Asia Airfreight Terminal.
There is also an investment property that has been classified as asset held for sale (S$2m-3m) which could boost non-core gains, in our view.

We maintain our target price (S$5.11), still based on blended DCF and 19x P/E valuations.
Net cash stood at S$439m. It is trading above +1 s.d. of 20x CY18F P/E, which is still lofty given the muted earnings expectations in FY18F.
Re-rating catalysts could come from stronger margins, Changi Airport’s roll-out of incentives to alleviate costs as well as higher-than-expected non-core gains.
Downside risks include market share loss and steeper-than-expected rate cuts from airlines.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-07-21

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 5.110 Same 5.110