SATS - UOB Kay Hian 2018-11-09: 2QFY19 Operating Profit Grows 8%, But Underlying Profit Remains Flat Due To Weak Associate Earnings.

SATS LTD. (SGX:S58) | SGinvestors.io SATS LTD. (SGX:S58)

SATS - 2QFY19: Operating Profit Grows 8%, But Underlying Profit Remains Flat Due To Weak Associate Earnings.

  • SATS' 2QFY19 earnings differed from 1Q19's with higher utilities cost and significantly weaker associate income. The latter was due to weaker forex and also higher concession fees at PT CAS along with weaker food solutions associate contributions.
  • We believe that the street is likely to be disappointed with the results. Still, we recommend investors to stay pat. The challenges are not structural in nature and would likely be overcome with increased automation.
  • Maintain BUY. Target: $5.60.


Marginally below expectations due to higher-than-expected opex and weak associate earnings.

  • SATS' 1HFY19 net profit amounted to 48.4% of our and 49% of street’s full-year estimates. 2QFY19's 6.3% revenue growth for the gateway segment was aided by a 242% y-o-y rise in ship calls and higher cargo volume handled (+3.3% y-o-y).
  • Excluding the deconsolidation impact of SATS HK, gateway services revenue rose 8.5% y-o-y. The increase in cruise business led to positive operating leverage, which contributed to a significant portion of the 8% y-o-y increase in operating profit. However, utilities cost rose 11%, partly due to a 30% increase in price of water since July, and also fuel costs.
  • SATS declared a 6 S cents interim dividend, unchanged from 1HFY18.

Indonesian associate and Brahims drag associate income down by 22%.

  • While we expected some pressure from forex, the decline in associate earnings was worse than expected. Food solutions associates and gateway services associates contributions fell by 27% and 20% respectively.
  • SATS indicated that forex losses amounted to S$2m or 11% of the decline.
  • PT CASS was also hit by higher concession fees in July and this along with lower earnings from its food solutions associate Brahim offset the incremental contributions from Malaysian GTR and Air India SATS.

TFK fared well but local inflight catering would have seen yoy decline.

  • The former's 11% top-line growth was aided by higher Chinese visitor arrivals and new contracts from Air Canada and Air India. SATS expects the trend to continue.
  • We estimate that local inflight catering operations would have declined by 2% due to continued pricing pressure. However, SATS indicated that despite the pricing pressure, operating margins remained flat, due to improved productivity.
  • Operating cash flow improved 12.8% y-o-y while FCF rose 17% to $63.4m.


Underlying revenue remains strong but associates face margin pressure.

  • The increase in concession rate for PT CAS was a key factor in the lower earnings at associates. We do not expect SATS to be able to pass on the cost increase for at least a year.
  • SATS also highlighted that cargo operating environment could potentially weaken in 2HFY19. Gateway associates earnings, which account for 88% of associate earnings, could be impacted.

Uncertainty over associates could curb upside in the short term, but stock should be supported near S$8.88.

  • We expect the stock to decline by about 8% over the next few weeks but we expect the S$8.88 level to hold as it would approximate a 8% dividend yield. We recommend investors accumulate near that level.
  • We also lower our fair value to S$8.88 from S$8.88.


  • We lower our FY19/20 net profit estimates by 8.8%/8.8%, mainly factoring in lower associate earnings.


Maintain BUY, but with a lowered target of S$8.88 vs S$8.88 previously.

  • We continue to value the company on an EV/Invested Capital basis with WACC of 8.8% and but we have lowered our sustainable growth rate from 8.8% to 8.8%.
  • Our long-tern ROIC estimate is also lowered from 88.8% to 88.8%.


  • Lower fuel prices and firmer emerging market currencies.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-09
SGX Stock Analyst Report BUY MAINTAIN BUY 5.60 DOWN 6.100