SATS Ltd - CGS-CIMB Research 2018-07-19: 1QFY19 Turkish Delight No More

SATS LTD. SGX:S58

SATS Ltd - 1QFY19: Turkish Delight No More

SATS' 1QFY3/19 net profit of S$64m (+12% y-o-y, -2% q-o-q) was in line with our and Bloomberg consensus expectations, at c.24% of our full-year forecast.
Key highlight: termination of MOU with Turkish Airlines, which could be a positive given the uncertainty hovering operational and currency risks.
Both food solutions and gateway services segments registered revenue growth. EBIT margin rose 2.3% pts to 14.8% with operational costs kept in check.
Weaker associates’ contribution was due to lower profit from associates/JV in Indonesia, albeit partially offset by better performance in other regions.

Maintain HOLD with lower target price of S$5.06. At 21x CY19F P/E, SATS is fairly valued in our view, until a significant earnings-accretive M&A deal resurfaces to grow its earnings.

Notwithstanding SATS's muted earnings growth in the longer run, we are relieved that it has terminated the MOU with Turkish Airlines (TUH).
Operational risks involving the move from existing Artatuk airport to the new airport in Istanbul was cited as a contributing factor. We believe the entanglement between Turkish Airlines and incumbent caterer Do & Co as well as unstable political and depreciating Turkish lira have also complicated the deal.
No major sunk costs were incurred, according to management.

PATMI rose 12% y-o-y to S$439m due to increase in meal volume across all regions as well as more flights and passengers handled. EBIT margin improved to 14.8% vs. 12.5% in 1Q18 as operating costs were kept in check, partially attributable to SHK’s deconsolidation (excluding which, revenue would be +5.9% y-o-y and operating costs +4.1% y-o-y).

Half of the operating profit from gateway services in 1QFY19 was contributed by stronger cruise terminal services which fetched relatively better operating margin due to higher operating leverage.
On the aviation-related side, SATS sees increased profitability from cargo handling and passenger services during the quarter on the back of higher volume.

This was primarily due to overseas associates/JVs.
The higher contribution from food solutions was attributable to associates/JVs in China turning profitable during the quarter, volume growth and new contracts won.

Management guided that its 60:40 Langfang JVCo with Wilmar to set up a central kitchen in Langfang, Hebei could take three years for profits to kick in. The JV would work on developing new food menu in the initial stages and will progressively ramp up production of items that are proven successful.

We adjust our 20x CY19F P/E (3-year mean).
Upside to our earnings could come from stronger-than-expected exceptional gains and earnings-accretive M&As. We think the strong operating cashflows from existing business should sustain its balance sheet and DPS of c.S$0.18.
Downside risks are multiplier effect from trade war affecting global freight yield.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-19

SGX Stock Analyst Report HOLD Maintain HOLD 5.06 Down 5.170