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.

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.

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.

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.

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.

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.

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