SATS - DBS Research 2018-05-31: Earnings Supported By Gateway Services And Associate/JV Income

SATS - DBS Vickers 2018-05-31: Earnings Supported By Gateway Services And Associate/jv Income SATS LTD. SGX: S58

SATS - Earnings Supported By Gateway Services And Associate/jv Income

  • SATS' FY18 underlying profit within estimates, driven by Gateway Services and better associate/JV contribution.
  • Final DPS of 12 Scts declared, above expectations.
  • Positive over the long term on the back of Changi’s development and Turkish Airlines negotiations.
  • Maintain BUY with Target Price of S$5.64.


Underlying FY18 earnings in line.

  • SATS reported underlying net profit of S$236.m (+0.8% y-o-y) for FY18, within our core earnings estimate. Headline 4Q18 earnings and FY18 earnings were S$65.4m (-1.8% y-o-y) and S$261.5m (+1.4% y-o-y) respectively.
  • FY18 earnings recognised one-off gains of about S$20m from the divestment of SATS HK, TFK property divestment, MacroAsia earnout and restructuring gain from Jilin Zhong Xin Cheng Food JV. Core net profit in line, after stripping out the one-off gains.

Core revenue was higher.

  • SATS' headline revenue in 4Q18/FY18 of S$423.5m (-0.5% y-o-y) and S$1,724.6m (-0.3% y-o-y) were within expectations. 
  • Food solutions fell 2.7% y-o-y to S$946.6m in FY18 despite 4.3% increase in meal volumes, led by TFK (-7.7% y-o-y to S$239.4m due to loss of Vietnam Airlines and reduction of Delta flights) and aviation food (- 2.8% y-o-y to S$472.5m). 
  • Gateway Services grew 2.9% y-o-y to S$776.5m in FY18 despite revenue loss from the deconsolidation of SATS HK to an associate. Core Gateway Services grew strongly at 7.3% y-o-y after excluding impact of SATS HK’s deconsolidation.

EBIT below estimate on higher than expected staff costs.

  • FY18 opex was flat at S$1,498.2m and operating profit at S$226.4m, largely on higher than expected staff costs and other opex (+9.4% y-o-y to S$146.2m, led by higher fuel costs, increased marketing activities, equipment rental costs, professional fees, exchange losses, and lower grants received). 
  • Staff cost declined 2.7% to S$833.3m, but we had expected a more aggressive decline. 
  • There were increases in licensing fees to S$84.2m (+16.7% y-o-y), depreciation (S$78.5m, +6.8% y-o-y), and decreases in raw material costs (-2.1% y-o-y, S$252.5m), accommodation and facilities costs (-5.6% y-o-y, S$103.5m) as well. 
  • FY18 EBIT margin remained relatively flat at 13.1% vs 13.3% (-0.2ppt).

Strong JV and associate contribution offsets lower than expected operating profit.

  • Associates was 9.2% y-o-y higher to S$71.2m, from improvement of gateway associates, particularly PT Cas and AISATS.

Higher dividend per share.

  • SATS declared final DPS of 12 Scts, above our expectation of 11 Scts. 
  • Full year DPS is 18 Scts, above our 17 Scts estimate.

Core earnings intact, positive over the long term.

  • We remain positive on the stock’s outlook over the long-term as core earnings remain intact. Growth drivers stem from:
    1. better passenger and air traffic growth at Changi Terminal 4;
    2. automation and staff productivity driving modest cost increase and better margins in the next few years;
    3. the development of a flight kitchen in Turkey; and
    4. the opening of Terminal 5.
  • We believe the potential development to set up the world’s largest flight kitchen in Turkey and Changi Terminal 5 will be positive key driver of the share price over the longer term. 
  • Negotiations with Turkish Airlines is ongoing and we expect return rates to be favourable if SATS eventually goes ahead with the development.

Maintain BUY with S$5.64 TP.

  • Our Target Price is lowered slightly to S$5.64 as we lower our operating profit to factor a slightly higher opex run rate.
  • Our earnings growth continues to be based on realisation of better productivity and operating cost leverage going forward.
  • Total returns including dividends is 10%. Maintain BUY.

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | https://www.dbsvickers.com/ 2018-05-31
SGX Stock Analyst Report BUY Maintain BUY 5.64 Down 5.670