SATS - UOB Kay Hian 2019-11-13: 2QFY20 Marginally Below Expectations Due To Consolidation Of Low-margin Business

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

SATS - 2QFY20 Marginally Below Expectations Due To Consolidation Of Low-margin Business

  • While SATS (SGX:S58)’s consolidation of food supplier Country Foods impacted margins, we believe the expanded distribution rights for other products could offer scale. SATS is also focused on improving its non-aviation food solutions business in China.
  • Earnings contribution from the region is still small but if SATS is successful, this could be a game changer. We recommend investors stay invested but accumulate on weakness.
  • Maintain BUY and target price of S$5.30.


Marginally below expectations due to lower margins from the consolidation of Country Foods.

  • The 7.6% y-o-y decline in net profit was higher than our estimate of a 3% decline. A key factor was the 100% consolidation of Country Foods on 5 Sep 19 from a 49% stake as an associate. See SATS Announcements; SATS Latest News.
  • Historically, Country Foods had low operating margins. In addition, other operating costs rose 28% y-o-y due to IT and equipment maintenance costs. Even excluding the consolidation impact, margins were lower due to a decline in cargo volume. 1HFY20 net profit amounted to 47% of our and the street’s full-year estimates.
  • SATS declared a 6 S cents interim dividend, unchanged from 1HFY19. See SATS Dividend History.

Excluding the consolidation of Malaysian GTR, gateway services revenue was flat yoy.

  • SATS indicated that its cargo handled at Changi fell 6% y-o-y and ship calls at Marina Bay Cruise Centre also declined as one of the vessels was undergoing repairs. This was offset by higher flights and pax handled.

JV & associate income fell 2.1% yoy, dragged by a 17% yoy decline in food solutions.

  • The decline in the latter was due to weak earnings from TAJ SAT, which continued to be affected by the loss of Jet Airways as a customer as well as start-up costs for operations at Daxing without corresponding revenue. SATS also indicated it has secured Air China as a customer. We reckon that this will give SATS scale at Daxing as it would serve the other two major carriers - China Southern Airlines and China Eastern Airlines.
  • On the gateway associates, SATS indicated it continued to be affected by weak earnings from AAT and Mumbai Air cargo, but we reckon that positive contribution from Indonesia offset the decline.

SATS generated S$86.4m in operating cash flow (OCF) in 1HFY20

  • SATS generated S$86.4m in operating cash flow (OCF) in 1HFY20, down 17 % y-o-y due to working capital change, excluding which, OCF would have risen 10.1% y-o-y.

Investing for future growth.

  • SATS has expanded its inflight kitchen facility at Haneda, ahead of the 2020 Tokyo Olympics and that the capacity has doubled. SATS expressed is confident it will be benefit from higher pax throughput as its competitors have not added capacity.
  • SATS also established a new low-cost inflight kitchen in Ganzhou, China, to improve its supply chain.


Country Foods is a drag on margins but expanded distribution rights could aid margin recovery.

  • The key negative for the quarter was weaker operating margins following the consolidation of Country Foods but it could still lead to positive synergy as SATS has now procured the rights to distribute SATS BRF Global’s other products into Singapore. This could offer scale to operations and improve margins.

SATS hopes to grow its non-aviation food solutions market in China

  • which is substantially bigger than the entire aviation catering market in Asia. If SATS is successful, the stock could be re-rated further.
  • For now, SATS’ balance sheet is strong and its operating margin is unlikely to deteriorate below 10%. We recommend investors stay invested for the long haul as we now have greater faith in SATS’ strategy.


  • We trim our FY20 net profit forecast by 1.2%, factoring in lower margins,post consolidation


  • Maintain BUY and target price of S$5.30. We value SATS on an EV/Invested Capital basis with WACC of 6.1%, long-term ROIC of 15.2% and growth rate at 2.4%. At our fair value, the stock trades at 24x FY20F PE. See SATS Share Price; SATS Target Price.


  • Improvement in margins in its China and Japan operations.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-11-13
SGX Stock Analyst Report BUY MAINTAIN BUY 5.300 SAME 5.300