SATS Ltd - Improving Outlook Already Priced In

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1HFY16’s (Mar) SGD107m profit (+18% YoY) made up 48% of our old FY16 estimate, with profit growth aided by declines in all operating costs save depreciation, as revenue remained weak (-4% YoY). Stay NEUTRAL, with a higher SGD3.70 TP (from SGD3.35, 3% downside) as most of the upside from upcoming operational improvements is priced in. We lift FY16F-17F profit by 5.6-8.5% to account for the continuing margin expansion and higher contributions from its JV in FY17.

Strong 1HFY16
In 1HFY16, while Singapore Airport Terminal’s (SATS) revenue dipped 4.3% to SGD840m, mainly from the transfer of its food distribution business to SATS BRF Foods JV and the weakening of the JPY, profit increased 18% YoY mainly due to lower costs. Staff (-1% YoY), raw materials (-15% YoY), licensing fees (-14% YoY) and utility costs (-8% YoY) together account for 88% of total operating cost. Contribution from associates/JVs also increased 17% YoY as growth was registered both in its gateway and food businesses.

Margin expansion to continue
While TFK, its Japanese subsidiary, may book higher revenue in 2HFY16 aided by contributions from its Delta Airlines contract, overall revenue growth remains uninspiring in the near term, amidst moderate traffic growth at Singapore’s Changi Airport. However, management‘s emphasis on productivity improvement through increased automation and gradual reduction in staff costs should enable SATS to continue reporting a steady rise in margins. We expect net margin to hit 14.9% in FY17F from 13.5% in FY16F and 11.2% in FY15.

Raising estimates
We increase FY16F-17F estimates by 5.6-8.5% respectively to account for:

i) continuing improvement in operating margins,

ii) higher revenue from TFK, and

iii) higher contributions from associates and joint ventures in FY17.

Amidst a lack of sufficient details on the nature of earnings contribution, we have not included the recently-announced Brahim’s acquisition in our earnings estimates.

NEUTRAL
SATS’ share price has risen 25% YTD as:

i) it continues to report operational improvements, and

ii) on its inclusion in the Singapore's benchmark Straits Times Index.

Technical Analysis
Daily Chart
Our DCF-based TP rises to SGD3.70 (from SGD3.35). Stay NEUTRAL, as the stock is trading close to its historical high forward multiples. (Read Report)

Read Related Reports
1) SATS Ltd - 2Q16: Impressive cost management and bottoming top line improves growth outlook by Credit Suisse Asia Pacific Equity Research, published on 5 November 2015

2) SATS - Lifted by BRF disposal by DBS Group Research, published on 5 November 2015

3) SATS - Solid earnings by Maybank Kim Eng Research, published on 5 November 2015

4) SATS Ltd - 1HFY16 largely in-line with our expectations‏ by OCBC Investment Research, published on 5 November 2015

5) SATS Ltd - Cost control measures effective; pipeline of opportunities by Phillip Securities Research, published on 5 November 2015

6) SATS Ltd - Deconsolidating costs to JV by CIMB Research, published on 4 November 2015

Source : RHB Research

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