On board flight to recovery

Results in line with expectations. SATS Limited reported a good set of 4QFY10 results yesterday. Revenue was up 19.6% YoY (-10.1% QoQ) to S$390.6m due to S$165.1m contribution from Singapore Food Industries (SFI) and higher aviation revenue of S$218.7m, while PATMI was up 10.2% YoY (-12.9% QoQ) to S$46.5m, driven by higher contribution from overseas associates which more than offset the lower jobs credit benefit of S$1.5m for the quarter. Both revenue and earnings were spot on with our expectations. For FY10, revenue raked up a growth of 44.9% to S$1,538.9m, whereas PATMI registered a 23.5% rise to S$181.2m. The group ended the fiscal year by proposing a final dividend of 8 SG cents. Including interim dividend of 5 SG cents, total FY10 dividend translates to a payout ratio of 78% (up from 73% in FY09) and a yield of 4.7%.

Operating data for aviation business. 4QFY10 saw higher aviation business volumes across all operations, reflecting the recovery of the aviation industry and the Singapore economy. However, growth from meals produced and cargo throughput in the quarter was still not enough to bring the volumes back to pre-crisis level on an annual basis, resulting in declines of 6.8% and 3.7%, respectively. On brighter note, passengers and flight handled rose 6.7% and 8.2% respectively due to more traffic from low-cost carriers and the addition of Tiger Airways to its customer base.

Performance at SFI. According to management, revenue at SFI declined 7.1% in FY10 (as opposed to estimated 5.0% decline in SATS ex-SFI contribution), due to lower food distribution revenue from its Singapore operations, discontinuation of operations at Cresset in UK and the weaker pound. However, due to cost management and synergies from integration, pre-tax profit and earnings improved by 72.4% and 92.9%, respectively. We understand that the integration process post-SFI acquisition is now substantially completed, with S$12.2m savings expected per annum (S$7.0m savings achieved thus far).

Maintain BUY. Going forward, SATS expects to see improvements in activity level in FY11 as airlines gradually reinstate their capacities on the back of increased flights and cargo throughput. In Singapore, it is expecting to benefit from the opening of the two integrated resorts and iconic events such as the Youth Olympic Games and F1 Singapore Grand Prix. As the results and outlook are in line with our view, we are holding our FY11F revenue intact for now. Our DCF-based fair value also remains at S$3.27, implying a 17.6% upside potential. Maintain BUY.

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