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

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.

Lower volume from Japan, offset by strong Singapore 

  • 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.

Breaking the cycle of yoy growth 

  • 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.

Associates gateway saved the day 

  • 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.

Expect better quarters ahead from non-core effect 

  • 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.

Maintain Hold 

  • 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