SATS - DBS Research 2019-11-13: Margins Remain Weak

SATS LTD. (SGX:S58)

SATS - Margins Remain Weak

SATS' 2QFY20 earnings below, dragged by cargo and contribution from lower margin operations.
Interim DPS of 6 Scts declared.
Cut FY20-21F earnings by 2-9%.
Maintain HOLD, S$5.06 Target Price.

We maintain our neutral stance on SATS (SGX:S58) with slightly higher Target Price of S$5.06 after rolling over our valuation peg from FY20F earnings to FY21F. We are less optimistic on earnings and have cut FY20-21F earnings by 2-9% on lower margin outlook, higher interest costs and lower associate/JV income. We believe cargo outlook will remain weak, hence weighing on profits and margins going forward.
The stock now trades at 22x FY21F PE or +0.5SD of its historical mean. Maintain HOLD.

We are neutral on the stock and expect lower margins and earnings growth going forward, led by a weak cargo outlook and consolidation of lower margin Ground Team Red (GTR) operations.

SATS' 2Q20 earnings of S$60.7m (-7.6% y-o-y) was below expectations despite revenue growth of 9.8% y-o-y to S$497m. Cost increases outstripped revenue growth while contribution from associates/JV along with net interest income were lower. These factors contributed to the lower than expected earnings. See SATS Announcements; SATS Latest News.
1H20 earnings made up just 45% of our previous full year estimate compared to historical trend of 49-52%.
An interim dividend of 6 Scts was declared, within expectations. See SATS Dividend History.

Revenue from Gateway and Food Solutions grew by 12.1% y-o-y and 8.1% y-o-y to S$225.9m and S$271m respectively to drive headline revenue growth of 9.8%.
The increase in Gateway revenue was largely due to the consolidation of Ground Team Red Holdings Sdn Bhd (GTR). Excluding this, Gateway revenue would have increased by only 0.6% y-o-y, affected by lower cargo and ship calls at Marina Bay Cruise Centre.
Food Solutions also saw consolidation from Country Foods Pte Ltd (CFPL) which was previously an associate. Food Solutions revenue growth would have been 2.6% y-o-y, largely based on volume growth, excluding consolidation impact.

EBIT margins were lower at 13.1% (-1.5ppts), stemming from lower cargo volumes and consolidation of lower margin GTR and CFPL entities. Margins for cargo was depressed on low volumes since a high proportion of cargo operating costs are fixed.
Key cost increases came from staff costs (+9.4% y-o-y, S$231.5m), raw material costs (+18.8% y-o-y, S$81.7m), depreciation (+39.1%, S$28.1m) and other costs (+27%, S$44.7m).
Associate/JV income was lower mainly due to lower contributions from Taj SATS Air Catering. Net interest income was also lower with the adoption of SFRS (I) 16, which led to higher interest cost.

We lowered our FY20-21F earnings by 2-9% to account for lower margin from consolidated businesses and lower margin from cargo.
While we raised revenue due to impact of consolidation, we also imputed higher staff, raw material and interest costs as well as lower associate/JV income, which led to lower margin estimates.

We maintain our neutral stance on SATS as cargo outlook remains weak. In addition, we believe the consolidation of lower margin entities such as GTR and CFPL will continue to weigh on earnings growth. Nonetheless, downside is limited for the stock as dividend yield is close to 4%.
Our S$5.06 Target Price is derived from a blended valuation framework using 22x FY21F PE (FY20F previously) and DCF (7.3% weighted average cost of capital and 3% terminal growth assumption). See SATS Share Price; SATS Target Price.
Maintain HOLD as we await margin recovery from improvement at GTR, CFPL and Cargo.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-11-13

SGX Stock Analyst Report HOLD MAINTAIN HOLD 5.06 UP 5.000