SATS - UOB Kay Hian 2019-06-03: Awaiting Details On Capex Plans As Outlined On Capital Markets Day

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

SATS - Awaiting Details On Capex Plans As Outlined On Capital Markets Day

  • SATS LTD. (SGX:S58) outlined a clear growth strategy which included plans to spend S$1b in 3 years and raise gearing to 30%. If all goes well, this could raise ROE. However, we believe that gestation periods for such projects will not be short and investors have to be patient.
  • For now, we do not expect a significant expansion in PE multiples. Maintain HOLD with an unchanged target price of S$5.05.
  • Entry price: S$4.70.



WHAT’S NEW


Accelerating capital investment for long-term growth, S$1b earmarked over the next three years.

  • SATS LTD. (SGX:S58) outlined its mission and strategy to maintain its leadership position as the Asia Pacific (APAC) market leader in aviation catering and ground handling as well as to be a leading central kitchen provider in the region. To this end, SATS indicated that it will allocate S$1b in capex and investments over the next 3 years, with gearing set to rise to 30%, and speed up digitalisation of cargo traceability and food procurement.
  • Planned acquisitions are likely to be bolt-on, in the form of existing inflight caterers or partnering with key players in China and India.

Aiming for a share of S$46b central kitchen and consumer food supply market in APAC.

  • The pie is expected to rise from S$38b in 2017 to S$46b in 2023 and is estimated to be higher than S$8b market size for inflight catering as at end-17. To achieve its goal, SATS outlined a three-tiered approach, such as localised inflight kitchens, central kitchens in Singapore and Kunshan, and lastly food factories for bulk production.
  • In China, SATS’ Kunshan kitchen counts Astons, Yum, Starbucks, Hai Di Lao, Walt Disney, Lunkin coffee, Shangri La as customers. SATS also has plans to set up a central kitchen at Tianjin as well as food factories.

On the gateway services front, SATS is building a digital platform,

  • that will enhance traceability, connectivity and cost efficiency across its cargo terminal operations in Asia.

Inflight catering market is attractive but SATS expects the market to consolidate as airlines divest stakes.

  • SATS expects the airline catering market to grow at a five-year CAGR of 8.5% from 2017 and it plans to raise its market share and thereby gain operating leverage from procurements. We reckon that SATS could be interested in acquiring the Asia Pacific operations of Gate Gourmet.
  • SATS also highlighted the retailing of inflight food as a form of ancillary revenue that it could provide to airlines.

India the star performer among associates; Greater China’s top-line growth not matched to bottom line.

  • While SATS is heavily invested in China and JV, earnings out of the region, including that from the 100%-owned Kunshan kitchen, fell 55.1% y-o-y in FY19, mainly due to a decline in ground services and inflight kitchen operations at Beijing. Catering and grounding handling operations out of India showed the highest growth in revenue and profitability among associates.
  • In ASEAN, there are clear signs of a slowdown in revenue, with just a marginal 3.7% y-o-y rise, but net margin at 12% was still the best among all associates, due mainly to PT CASS.


STOCK IMPACT


Not a new strategy but we now have a clearer understanding of SATS’ challenges and opportunities.

  • We agree with SATS approach to grow its business in fast developing countries. However, cost pressures are likely to keep margins low, even for central kitchens. SATS, however, believes that the formation of central kitchens to supply to fast casual restaurants could be a disruptive trend, which it plans to capitalise on. We agree, but we are unsure on the gestation period for the business to start contribution in a meaningful way.

Premature to factor in incremental earnings or value creation from planned capex.

  • SATS has a patchy track record in China, in part to a reduction in shareholding. Thus, execution risk is high. India has its own challenges, due to infrastructure bottlenecks and unique food consumption patterns.


EARNINGS REVISION/RISK

  • We have revised our maintenance and new project capex assumption by 10% for the next 3 years, but have not incorporated acquisition or new investment capex. There is no material change to our earnings forecasts.


VALUATION/RECOMMENDATION


We remain neutral on SATS.

  • While the planned capex is substantial and likely to be accretive, we believe that ROIC might not be accretive over the next 2 to 3 years, given the long gestation periods to achieve scale.
  • Maintain HOLD with an unchanged target price of S$5.05.
  • Suggested entry level at S$4.70.


SHARE PRICE CATALYST

  • 1QFY20 results in August.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-06-03
SGX Stock Analyst Report HOLD MAINTAIN HOLD 5.050 SAME 5.050



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