SATS - DBS Research 2018-07-20: Raising Dividend Expectation

SGinvestors.io

SATS LTD. SGX:S58

SATS - Raising Dividend Expectation

• 1Q19 earnings in line, growth driven by lower than expected opex. 
• Termination of MOU with Turkish Airlines will free up cash resources. 
• Raise DPS to 19 Scts and 20 Scts for FY19-20F. 
• Maintain BUY with S$5.65 target price. 

Maintain BUY, Target Price S$5.65.

• We maintain our positive stance on the long-term prospects of SATS and have raised our target price slightly to S$5.65.
• Following cessation of discussions with Turkish Airlines over the development of a flight kitchen in Turkey, we now raise our DPS going forward by 1 Sct and 2 Scts for FY19F and FY20F respectively. 
• Growth will be driven by
  1. passenger and air traffic growth at Changi Terminal 4;
  2. automation and staff productivity driving modest cost increases and better margins in the next few years;
  3. the opening of Terminal 5 by 2030; and
  4. more positive outlook from TFK Japan. 

Where we differ.

• We have not factored in development of Turkey into our target price and earnings and are hence neutral on the termination of the MOU to set up the world’s largest flight kitchen in Turkey. 

Potential catalyst.

• While the MOU with Turkish Airlines has ceased, there are new catalysts for the stock in the form of
  1. better outlook in Japan;
  2. freeing up of financial resources from the MOU to pursue other deals and to pay out more dividends; and
  3. faster than expected ramp up of Terminal 4. 

Valuation: 

Blended DCF and PE valuation methodology. 

• Our Target Price is S$5.22x FY19F earnings. 
• Stock is supported by FY20F dividend yield of 3.9%. Maintain BUY for 11% upside. 

Key Risks to Our View: 

• Our earnings growth takes into account a recovering aviation outlook and better cost structure. Slower recovery in air traffic and failure to keep operating costs in check are key risks to our earnings and target price. 

WHAT’S NEW - 1Q19 results 

1Q19 earnings in line.

• SATS' 1Q19 earnings of S$63.9m (+11.5% y-o-y) was within estimates. The quarter saw lower than expected operating expenses, offset by lower than expected Associates & JV income. 
• Revenue was otherwise in line led by stronger Non-Aviation Food and Airport Services segments. 1Q19 revenue does not include SATS HK, which has already been deconsolidated into associate/JV income compared to 1Q18, which still had SATS HK in it. 

Revenue driven by Airport Services and Non-Aviation Food.

• Revenue grew 3% y-o-y to S$43200m, +3.4% y-o-y). 
• Non-Aviation Food segment also grew by 16.9% y-o-y to S$60.2m. Excluding impact of SATS HK, core revenue would have grown 5.9% y-o-y. TFK also grew to S$60.7m (+3.1% y-o-y) led by new accounts including Air Canada and Air India. There was volume growth in Aviation Catering on the back of new accounts including the relocation of Qantas’ hub to Singapore for its Australia- Europe flights, while its 60% JV with Yihai Kerry kitchen in Shanghai contributed to increase in Non-Aviation Food as well. 

Opex remained flat.

• Opex was flat at S$375m, similar to 1Q18. 
• Decline in staff costs and forex gain of S$3.7m were offset by slightly higher licensing fees and depreciation charges. Operating margin improved 2.3ppt to 14.8% largely from Gateway, driven by non-aviation segments, especially from cruise centre’s implementation of technology. Approximately half of the improvement in Gateway’s operating profit came from the cruise centre. 
• On the food side, the new central kitchen with Yihai Kerry has already broken even within three years, while in Aviation, there were staff productivity gains and higher volumes from cargo which supported better margins. TFK is returning to growth and this also reflected in the higher profitability. 

Flat associates and JV income below expectation.

• Associates and JV income were flat at S$15.3m. There was lower contribution mainly from PT JAS and PT CAS, mainly due to decrease in cargo volumes at Jakarta. However, these were offset by contribution from AAT at HKIA, Air India SATS, TajSATS, GTR (AirAsia partnership) and MCSC (Mumbai Cargo Service Centre). 
• Gateway Services associates reported decline of 8.3% y-o-y to S$11.1m while Food Solutions Associates reported improvement of 23.5% y-o-y to S$4.2m. 

MOU with Turkish airlines terminated.

• SATS’ MOU with Turkish Airlines to develop a flight kitchen in Turkey was terminated by mutual agreement, largely due to the October deadline shift from Istanbul's Ataturk Airport to Istanbul New Airport resulting in Turkish Airlines’ being unable to proceed. 

New Langfang JV, to start kitchen in Beijing.

• SATS recently announced its second 60% JV with Wilmar over a new second central kitchen in Beijing. The kitchen will develop new menus for foodservice restaurants and produce large batch soup and sauce amongst other food items for sale to their central kitchens. 
• Breakeven is expected to be 3 years. 

Positive outlook for TFK on higher tourist arrivals.

• Outlook for Japan is positive as tourist arrivals grew 19% y-o-y to 28.7m in 2017 driven by the Koreans and Chinese. Events including the G20 meeting in 2019 and Tokyo Olympics and Rugby World Cup in 2020, will drive more tourist arrivals into Japan. 
• Japan is also targeting 40m and 60m tourists by 2020 and 2030. 

Raise DPS to 19 & 20 Scts for FY19F and FY20F respectively.

• Following termination of MOU with Turkish Airlines to provide in-flight catering services in Turkey, we now see less of a strain on available financial resources, and hence believe SATS will have more cash available to pay shareholders which leads us to increase DPS for FY19-20F by 1 Sct and 2 Scts each to 19 and 20 Scts respectively. 

Alfie YEO DBS Group Research Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2018-07-20

SGX Stock Analyst Report BUY Maintain BUY 5.65 Up 5.640