SATS Ltd - CIMB Research 2018-02-13: It Pays To Wait

SATS Ltd - CIMB Research 2018-02-13: It Pays To Wait SATS LTD. S58.SI

SATS Ltd - It Pays To Wait

  • SATS' 3QFY3/18 net profit of S$67m (+2% y-o-y, 16% q-o-q) was in line with our and Bloomberg consensus expectations. 9MFY18 formed c.76% of our FY18 forecast.
  • EBIT margin was steady at 14.9% in 3QFY18, with staff cost under control, albeit offset by some increase in fuel costs and absence of incentives from Changi Airport.
  • Still in discussion with Turkish Airlines on a JV; details will only be shared in 4QFY18.
  • JV with AirAsia started operations in Nov 17, but financial closing was in Jan 18.
  • TFK remained weak but Singapore operations strong, in line with Changi Airport data.
  • We raise FY20F EPS by 9% on lower staff costs and increased revenue from Turkish Airlines. Our Target Price rises to S$5.17, still on 20x 2019F P/E (3-year mean). HOLD.

“OK” quarter 

  • Revenue was steady at S$439m in 3QFY18 (+1% q-o-q and 0% y-o-y). EBIT margin was at 14.9%, better than 2QFY18’s 14.1% but slightly lower than 3QFY17's 15.1%. Staff costs were well controlled at 47% of revenue vs. 48.8% in 3QFY17; we believe automation played a part in this. 
  • However, these positives were offset by the increase in licensing fees (+5% q-o-q, +22% y-o-y) and other costs (+6% q-o-q, +17% y-o-y) due to higher fuel costs and absence of some incentives from Changi Airport.

Associates included SATS HK loss 

  • Associate profit contribution from gateway dropped 5% y-o-y to S$10.6m as it included the full quarter impact of de-consolidating SATS HK. Excluding this, associates in Indonesia are holding up well, in line with the strengthening of the cargo market.

TFK takes time to see new contracts kicking in 

  • Revenue from Japanese subsidiary TFK dropped 2% q-o-q and 3.5% y-o-y in 3QFY18, due to the effect of volume decrease following the loss of Vietnam Air's in-flight catering to ANA, as well as the shifting of Delta's Asian hub from Tokyo to Shanghai. 
  • The new contracts TFK has secured will only start to contribute in the next few months.

Start-up costs for JV with AirAsia 

  • The JV with AirAsia started operations in Nov 17 but the transaction was only formally concluded in Jan 18. Management shared that there were some start-up costs involved (read: losses). We have assumed earnings contribution of c.S$7m for FY19F.

Still ironing out details with Turkish Airlines 

  • SATS will share more details on the final structure of its JV with Turkish Airlines in 4QFY18; the MOU was signed in Oct 17. Management shared that it would expand its new kitchen in Istanbul in phases and the process would take two years. 
  • There is also a possibility that the new airport in Istanbul could be ready by end-2018, in which Turkish Airlines would need an interim kitchen and SATS may or may not be the partner. 
  • We assume the JV will be a 50/50 ownership and contribution to begin in FY20F.

Maintain HOLD but up Target Price to S$5.17 

  • We raise our FY19-20F EPS by 9% to reflect lower staff costs and increased revenue from Turkish Airlines. Our Target Price is raised to S$5.17, still based on 20x 2019F P/E (3-year mean). Maintain HOLD. 
  • We advocate to wait for a share price correction to buy. 
  • The stock is trading at +2.5 s.d of its 5-year mean. The hype on the JVs with Turkish Airlines and AirAsia could dissipate if earnings do not materialise. 
  • Downside risk are hiccups in new markets. Upside risk are exceptional gains that could lift overall ROE.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-02-13
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 5.17 Up 4.810