SATS - Maybank Kim Eng 2019-02-14: A Solid Operational Quarter

SATS LTD. (SGX:S58)

SATS - A Solid Operational Quarter

SATS LTD. (SGX:S58)'s 3Q19 revenue and core associate/JV growth of 5.5%/9% y-o-y was better than we expected against the weaker tourism backdrop in the quarter. Core profit grew a more muted c2% but mainly due to some one-off project costs. Recent investments are ramping up well and the new project pipeline holds promise too.
Our FY19E-21E forecasts are unchanged but we have trimmed Target Price slightly by 2% to SGD5.80 from SGD5.90 on a change to DCF valuation (based on 21x P/E, 1SD over 5Y mean earlier; refer to attached PDF report for details).

Gateway Services (GS) and Food Solutions posted 3Q revenue growth of c6%/5% outpacing the aircraft and passenger movement growth at home base Changi Airport during the quarter. In particular GS revenues have been benefitting in recent quarters from some cruise line customers using Singapore for ‘home base’ berthing.
Management indicated that a large proportion of the c7% increase in operating cost, which muted margins and core profit growth, were one-off in nature for productivity-related IT upgrades and professional fees for new projects.

Associate/JV profit rebounded to positive growth of c9% y-o-y after the c22% decline witnessed for 2Q19 which was due to increases in concession fees at its Indonesia ventures; we expect further improvement as these increased costs are priced gradually through in customer contract renewals.
Most associate/JV entities delivered with the notable exception of Brahims catering, where a turnaround continues to be elusive.

Apart from some further consolidation in its Singapore home market position, we expect the recent ventures in China (commercial kitchens), India (Mumbai international airport cargo facility), Saudi Arabia (Dammam cargo facility) and Malaysia (GTR JV for ground handling) to be the key growth contributors in the coming 12-18 months.
A material new project in the pipeline is a minority partnership for ground, cargo handling and inflight catering at Beijing’s new Daxing International Airport starting late 2019.

Our Target Price has been trimmed by c2% to SGD5.80 from SGD5.90 due to a change in valuation methodology to a discounted cashflow versus that based on a forward P/E equal to 21x (1SD over its 5-year mean) FY20 EPS used earlier.
The methodology change, in part, is a reflection of the increasing number of new initiatives and ventures in recent years that are greenfield in nature or involve longer investment gestation periods (such as the China commercial kitchens, Middle-East cargo terminal etc.) before contributing compared to the past. A one-year forward multiple based valuation does not adequately capture the contribution potential of such ventures, in our view.
On a calendarised basis, SATS trades at 18x 2019 P/E, a 12% premium to the Singapore industrials stocks basket (excluding the shipyard stocks SEMBCORP MARINE LTD (SGX:S51), COSCO SHIPPING INTL(S) CO. LTD (SGX:F83) and YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6), which trade at extremely high P/E multiples due to a depressed profit base) and an 8% discount to a basket of international airport and aviation services companies.

Neel Sinha Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-02-14

SGX Stock Analyst Report BUY MAINTAIN BUY 5.80 DOWN 5.900