SATS – CIMB

Rich valuations

Maintain UNDERPERFORM and target price of S$2.19. 4Q10 net profit rose 10% yoy to S$46.5m, in line with our expectation of S$43.2m and consensus estimate of S$45.2m. FY10 net profit of S$181.2m forms 102% of our estimate and 101% of consensus. The decline in Jobs Credit benefits in 4Q10 to S$1.5m from S$12.3m in 4Q09 was offset by a sharp jump in associate profits to S$13m from S$4m a year ago and S$4.5m in prior years’ tax overprovision. The company declared a final dividend of 8 Scts, which brings its full-year dividend to 13 Scts. This translates to a 78% dividend payout ratio and a 4.7% dividend yield. Our FY11-12 EPS estimates are raised by 1-2% as we lift assumptions for revenue and associate profits. We maintain our UNDERPERFORM call due to its rich valuations and limited catalysts. Our target price remains at S$2.19, still based on 12.4x CY11 P/E.

Rise in revenue. 4Q10 revenue rose 20% yoy to S$391m mainly due to the consolidation of SFI, which contributed S$165m vs. S$110m (two months contribution) in 4Q09. Aviation revenue also recovered on the back of a rebound in aviation statistics across the board as passengers handled grew 21% yoy, flights handled rose 11% yoy and cargo/mail processed jumped 16% yoy. Operating profit slipped 12% yoy to S$40.3m due to lower Jobs Credit benefits while operating margin narrowed to 10.3% from 14% in 4Q09. The 225% jump in associate profits to S$13m was attributed to stronger performance from the HK and Indonesia ground handling operations. Net margin contracted to 12% from 12.9% a year ago.

FY11-12 EPS estimates raised. We raise our FY11-12 EPS estimates by 1-2% as we lift our assumptions for revenue and associate profits. We also introduce our FY13 estimates.

Target price maintained. Our target price remains at S$2.19, still based on 12.4x CY11 P/E, its historical mean since Mar 03. While SATS has received a technical ramp license, which allows the company to provide complete ground handling services, the impact is limited in the near-term as most airlines have existing contracts with CIAS and SIAEC. The pending re-entry of a 3rd ground handler at Changi Airport is likely to cap long-term margins. We maintain our UNDERPERFORM call.

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