SATS (SATS SP) - UOB Kay Hian 2018-02-14: 3QFY18 Flat Core Net Proft As JVs’ Fall Short Of Expectation

SATS LTD. S58.SI

SATS (SATS SP) - 3QFY18 Flat Core Net Proft As JVs’ Fall Short Of Expectation

Excluding EI gains and the cessation of licensing rebates, SATS’ core net profit would have risen by 1.3%.
While below expectations as JV and associates earnings disappointed, we believe that the long-term growth prospects are highly positive given its widening footprint in Turkey and China.
SATS is also one of the few companies which can deliver a relatively high ROIC of 16%, well above its cost of capital.

In reporting its underlying net profit, SATS excluded S$4.5m in earn-out considerations from MacroAsia catering services but did not exclude S$3.9m in higher licensing fee’s arising from the cessation of rebates. Taking both into account, PBT would have risen by 5.1%, while core net profit would have risen by 1.3% y-o-y.
JV and associate earnings however lagged expectations. 9MFY18 net profit amounted to approximately 78% of consensus core earnings and 72% of our estimateS.

We also believe that this would have led to higher core operating profits. Food solutions remain a drag with lower contribution from local inflight catering and TFK, although the pace of decline narrowed from 2QFY18’s 3.5% and 13.6% decline respectively.
SATS indicated that Japanese caterer, TFK continues to see lower volumes and that it was affected by Delta’s preference for the Shanghai hub for connecting traffic as opposed to Narita.

While staff costs declined 3.5% y-o-y, SATS indicated that excluding the deconsolidation impact staff costs rose marginally but this was partly due to the withdrawal of wage credits. Opex was also hit by higher fuel costs, exchange losses and lower grants from Changi.
When queried on the likelihood of higher fees from Changi, SATS indicated that there is no increase in licensing fees. The EI gain from the earn-out consideration is due to MacroAsia not meeting additional equity targets.

In 2QFY18, the segment grew 56%, due to a 50% rise in gateway services profits. However, in 3Q, the segment grew by only 7.9% due to losses from SATS HK.
Management however indicated that as Hong Kong airlines ramps up capacity, losses are likely to narrow. SATS has also not recognised any earnings contribution from the AirAsia ground handling JV but will do so from Jan 18.

Despite the lower-than-expected JV & associate growth, we remain bullish on SATS for its long-term growth prospects. Our earlier upgrade was based on SATS’ expansion into Turkey, it gaining a foothold in Malaysia and prospects for future growth when the Daxing Airport becomes operational in 2019. These factors remain valid and we believe that SATS will emerge as a global food solutions and gateway services company.
Where we erred was in our estimates on JV & associates growth as we did not expect SATS HK to dilute JV earnings. We have however lowered our earnings and thus there is less risk of downside surprises.

We lower our FY18 and FY19 net profit estimates by 5.5% and 6.2% respectively after factoring in lower JV and associates earnings.

We continue to value the company on an EV/Invested Capital basis with WACC of 6.3% (previously 6.1%) and long-term ROIC of 16%, growth rate of 3.0% (previously 3.3%).
At our fair value, the stock will trade at 25.2x FY18F PE and an ex-cash PE of 24.7x.

K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-14

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