SATS Ltd - CGS-CIMB Research 2019-05-17: Look Forward To Inorganic Growth

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

SATS Ltd - Look Forward To Inorganic Growth

  • SATS LTD. (SGX:S58)'s 4Q19 profit of S$49.9m missed consensus and our expectations due to one-off (-S$2.1m) in associates/JV. SATS core operations remained robust.
  • Final DPS was a positive surprise at S$0.13, bringing total DPS to S$0.19, a decent 4% yield. SATS had net cash of S$254m at end FY3/19.
  • Inorganic growth could be the key catalyst for SATS. It acquired a 50% stake in an airlines frozen food business in Nanjing for c.S$31m.
  • Maintain ADD.

Associates not as bad as it looks, expect +3% y-o-y in FY20F

  • SATS LTD. (SGX:S58)'s FY19 net profit of S$248m was below at 92% of our forecast and 96% of consensus.
  • 4Q19 associates profit of S$8.9m (-63% y-o-y, -57% q-o-q) included S$3.3m provisions for doubtful debts and asset write-down as well as S$1.2m share of DFASS SATS profits from disposal of KrisShop. Stripping EIs, associates profit for 4Q19 was S$11m (+11% y-o-y), partly due to consolidation of its AirAsia associate, Ground Handling Team Red Holdings (GTR).
  • Franchise fee in Indonesia was successfully passed-through to customers in 4Q19 but cargo business was affected by trade tension.
  • We lower our associates profit forecast to +3% y-o-y growth to S$61m in FY20F (previously S$74m).

Consolidation of GTR could add S$8m in operating profit p.a.

  • SATS has started to consolidate GTR entities (previously equity accounted in gateway associates). In 4Q19, S$21.3m/S$19.4m of revenue/opex was consolidated (operating profit: S$1.9m). GTR’s margin of 9% was lower than SATS’ existing gateway business (10%) due to costs incurred to build the cargo handling business in KL, in 4Q19.
  • We forecast c.S$8m OP p.a. from GTR. As the cargo handling business only ramped up in 4Q19, the consolidation of GTR will not cause a major drop in gateway associates in FY20F but SATS staff costs will go up by c.S$14m/qtr.

Stronger operating profit, EBIT margin improved for the 5th year

  • Our comments here exclude the effects of GTR consolidation. SATS delivered a fourth consecutive quarter of y-o-y revenue growth (6%) in 4Q19, better than expected, driven by food solutions (+7% y-o-y) and gateway (+5% y-o-y). Accordingly, operating profit was up 6% y-o-y to S$48.9m in 4Q19, mainly from savings in raw materials costs (only up 3% y-o-y).
  • EBIT margin in 4Q19 was flat y-o-y and weaker seasonally at 10.8% but expanded to 13.5% in FY19 (FY18: 13.1%), on track with management target to improve yield.

China acquisition looks earnings accretive

  • SATS also announced the acquisition of a 50% stake in Nanjing Weizhou Airline Food Company at c.S$31.2m (cash and shares), to be completed by Aug 19. No financial details were given but on a 25x P/E assumption, the deal could add S$1m-2m to its profit.

Maintain ADD with a Target Price of S$5.46, based on 21x CY20F P/E

  • We cut our FY20-21F EPS by 4-5% on lower associates.
  • Our Target Price is based on its 3-year g valuations.
  • Sizeable M&A is key catalyst.
  • Economy slowdown is a risk.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-17
SGX Stock Analyst Report HOLD MAINTAIN HOLD 5.460 SAME 5.460