SATS - DBS Research 2019-05-21: Continues To Grow Regionally

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

SATS - Continues To Grow Regionally

  • SATS's 4Q19 earnings in line, growth driven by gateway segment.
  • Final DPS of 13 Scts declared.
  • Stock supported by c.4% dividend yield.
  • Maintain BUY with lower Target Price of S$5.44.

Maintain BUY, Target Price of S$5.44.

  • We maintain our positive stance on SATS LTD. (SGX:S58) with a BUY recommendation and Target Price of S$5.44.
  • We remain positive that Changi and the region’s aviation growth will continue to drive the long-term earnings growth for SATS.
  • SATS continues to be supported by decent dividend yield of c.4%. See SATS's dividend history.
  • Long-term growth drivers include
    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 are positive over SATS’s long-term prospects for passenger throughput growth over the next few years with Changi’s development, and Japan’s target of 40m and 60m tourists by 2020 and 2030 respectively which is positive for TFK Japan’s outlook. Our estimates are in line with consensus.

Potential catalyst.

  • Catalysts for the stock include
    1. better outlook in Japan;
    2. freeing up of financial resources from the Turkish Airlines MOU to pursue other deals and to pay out more dividends; and
    3. faster-than-expected ramp-up of Terminal 4.


  • Blended DCF and PE valuation methodology. Our Target Price of S$5.44 is based on the average of discounted cash flow (DCF) valuation (7.3% weighted average cost of capital and 3% terminal growth assumption) and PE valuation pegged to 22x FY20F earnings.

Key Risks to Our View:

  • Our earnings growth takes into account a recovering aviation outlook and better cost structure. A 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 - Continues to grow regionally

FY19 earnings within estimates:

  • SATS's FY19 earnings were largely in line, with PBT coming in at S$307m (-4.4% y-o-y) vs our S$313m forecast. Operating profit was in line at S$247m vs our S$244m estimate. Headline and core net profit came in at S$248m (-5% y-o-y) and S$241m (+2.2% y-o-y), respectively, vs our S$252m forecast.
  • The lower PBT and PAT y-o-y was due to lower contribution of associate/JV income which declined to S$58.9m (-17% y-o-y), dragged by the lower Food Solutions segment.
  • Final DPS of 13 Scts was declared, higher than 12 Scts last year. This brings SATS's total DPS for the year to 19 Scts, which was within our expectations. See SATS's dividend history.

Revenue beats estimates:

  • Revenue was better than expected at S$1,828m (+6% y-o-y, vs our S$1,798m estimate). The stronger-than-expected revenue was driven by strong Gateway revenue (+7.9% y-o-y, S$837.8m) from higher volumes of flights handled, improvement in cruise terminal operations, and consolidation of Ground Team Red Holdings Sdn Bhd and Ground Team Red Sdn Bhd (which helped to lift revenue by S$21m) from 1 January 2019. Gateway Services revenue would have grown by 5.2% y-o-y even without the consolidation.
  • Food Solutions grew 4.4% y-o-y to S$988.2m driven largely by TFK (S$248m, +3.6% y-o-y) and the non-aviation business in China (+140% y-o-y).

Operating profit in line, better operating margins.

  • Opex rose 5.5% y-o-y to S$1,581m led by increases across the board from volume and revenue growth, and partial contribution by the consolidation of Ground Team Red Holdings Sdn Bhd and Ground Team Red Sdn Bhd (totalling about S$19m). Staff and raw materials costs accounted for approximately two thirds of the increase. Nonetheless, staff costs for the full year grew by just 4.9% y-o-y to S$874m, helping operating margin expand to 13.5% (+0.4ppt).
  • SATS's 4Q19 operating margins remained flat at 10.8%. Core operating margins would have been slightly higher without the consolidation of the Ground Team Red entities.

Lower associates/JV income from Food Solutions:

  • Associates and JV income came in at S$58.9m (-17.3% y-o-y) dragged by lower contribution from Food Solutions (S$12.8m, -50% y-o-y). Gateway services associates/JV contributed 1% growth y-o-y with S$46.1m. There was one-off gain for increase in stake in Evergreen Sky Catering which saw a negative goodwill amounting to S$11.6m in FY18. Excluding one-off gains, Associates/JV income would have declined by S$7.7m.
  • The decline is also due to more provision of doubtful debts across both Gateway Services and Food Solutions.

Takes 50% stake in Nanjing Weizhou Airline Food Company.

  • SATS has also just announced the purchase of a 50% stake in Nanjing Weizhou Airline Food Company, a major producer of frozen food, ambient meals and food components for aviation companies. It has a network of 12 cold storage facilities and distribution channel partners serving 80 domestic airports across China. SATS will have majority board control and key management positions. It enables SATS to enter the frozen food development production capabilities and have access to strong aviation customers in China.
  • SATS will pay 45% for S$25.5m and 5% for new shares at S$5.7m. The acquisition is targeted for completion in August 2019 and will be earnings accretive.

Maintain BUY, Target Price of S$5.44:

  • Our earnings estimates are largely unchanged. Growth going forward will stem from
    1. 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; and
    3. the opening of Terminal 5.
  • Our Target Price for SATS is derived from a blended valuation using 22x FY20F EPS and DCF (7.3% weighted average cost of capital and 3% terminal growth assumption). The stock is supported by FY20F dividend yield of c. 3.9%.
  • Maintain BUY.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-05-21
SGX Stock Analyst Report BUY MAINTAIN BUY 5.44 DOWN 5.590