SATS - Reaping benefits via automation

■ EBIT margin expansion driven by automation of operational processes

■ Growing meat processing and distribution scale through BRF JV

■ 2016E PER of 19.7x and dividend yield of 3.9% based on consensus

Background:
SATS, a Singapore-based airport logistics firm, was included in Singapore’s Straits Times Index on 21 September 2015. We met with the company’s management to understand its productivity improvement steps.

Highlights:
Staff and raw-material expenses are SATS’s largest cost components (51% and 22% of FY15 total expenditure, respectively). Management cited upward pressure on staff costs (1.9% CAGR over FY12- 15) including foreign worker levies, due to the difficulty of sourcing manpower. In order to reduce the demands on staff, SATS has been automating its operational processes over the years. This led to a 4.6% CAGR in PATMI from FY12-15, despite a 6.3% CAGR decline in sales, driven by improving profitability as the EBIT margin rose by 1.3pp over the period. SATS’s drive in automation has resulted in higher capex (FY15: SGD61.3m vs. FY13: SGD37.8m). Management disclosed that most of its capex in the near term would be directed towards improving productivity.

Geographically, Singapore contributed 82% of the company’s FY15 sales, with 13% from Japan and 5% from other countries. Foreign regulatory restrictions present a key obstacle in SATS’s investments in overseas entities. The company’s presence in other markets has been established via associates. Associates are key net-profit generators for SATS (21% of FY15’s profit before tax). SATS is keen on increasing its interest in its associates if the opportunity arises.

In July 2015, SATS paid SGD5.1m to raise its stake in its Philippines’ food catering associate from 20% to 33%. In June 2015, SATS entered into a 51:49 JV with BRF S.A., Brazil’s leading producer of meat products.

Management said the JV aims to grow both firms’ food distribution and meat processing business in Singapore in 2 ways:
1) moving towards higher value-add meat processing (marination and ready-to-eat meals), and

2) expand its portfolio of branded food products. The JV has plans to expand into other Southeast Asian markets.

By business segment, SATS derived 80% of its sales from food catering in FY15 and the remainder from providing gateway services. The former includes in-flight and commercial catering (such as corporates and the Ministry of Defence), while the latter includes airfreight and baggage handling as well as aircraft interior and exterior cleaning.

SATS does not have a fixed dividend policy. Over the past 5 years, its dividend payout ratio (excl. special dividends) has ranged from 63-81%.

Technical Analysis
Daily Chart
Valuation:
The stock is trading at a 2016E PER of 19.7x and dividend yield of 3.9%, based on the Bloomberg-consensus forecasts. (Read Report)

Source : Daiwa Capital Markets

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