SATS - OCBC Investment 2019-11-13: Lower Operating Margin

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

SATS - Lower Operating Margin

  • Growth driven by consolidations.
  • Higher expenditure.
  • Continues to invest in growth initiatives.

2QFY20 results in-line

  • SATS (SGX:S58)'s 2QFY20 revenue was up 9.8% y-o-y to S$497.4m, boosted by Food Solutions and Gateway Services, but dragged down by lower cargo revenue. See SATS Announcements.
  • Revenue from Food Solutions grew S$20.1m or 8% y-o-y to S$271m, mainly attributable to the growth in core subsidiaries and the consolidation of Country Foods (CFPL) which contributed ~69% of the growth.
  • Gateway Services’ 2QFY20 revenue grew S$24.3m or 12.1% y-o-y to S$225.9m, driven by the consolidation of GTR entities and partially offset by weak cargo revenue and lower ship calls.
  • Group expenditure rose 11.7% y-o-y, due to consolidation of GTR and CFPL, as well as higher IT expenses for digitalisation and transformation. As such, 2QFY20 PATMI fell 7.6% y-o-y to S$60.7m, making up 24.6% of our initial full year forecast, which is within expectations.

Cargo remained a drag

  • For 1HFY20, SATS’ passengers and flights handled grew 55% and 124% y-o-y, mainly due to the consolidation of GTR in Malaysia. Meal served rose 3.8% y-o-y driven by the growth in Singapore and Japan.
  • On the other hand, cargo remained weak. Cargo volume fell 2.5% in 1HFY20, weighed by weakness in Singapore (-6% y-o-y) and also weaker contribution from AAT, SATS’ cargo operation in Hong Kong, impacted by the disruptions in Hong Kong and trade tensions between US and China.
  • The drop in cargo was partially offset by a small increase from GTR’s cargo operation.

Operating margin under pressure

  • Operating margin for 2QFY20 dropped 1.5% ppt to 13.1%.
  • As management expects the weakness in cargo revenue (a segment with particularly strong operating leverage) to persist for the next couple of quarters, and together with higher expenditure expected from the number of growth initiatives SATS plans to invest, for example, in digital supply chain capabilities, digital centres, new kitchens and ground handling business in China, expansion of capacities in Japan, etc., we believe that these will continue to weigh on the operating margins in 4QFY20 and FY21.
  • Near-term catalysts could be the growth in e-commerce volumes which could provide a buffer to the cargo revenue and higher expected passenger/flights volumes in Japan due to Olympics.
  • See SATS Share Price; SATS Target Price.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2019-11-13
SGX Stock Analyst Report HOLD MAINTAIN HOLD 5.280 SAME 5.280