SATS – DBSV

Expect stronger quarter ahead

At a Glance

• 1Q11 within expectations; net profit +10% yoy

• Lower EBIT (-7%) due to cessation of Jobs Credits mitigated by stellar 62% growth in JVs contribution

• Stronger quarters ahead on further pick up in activities (YOG, F1, airlines yields/load factor, etc)

• Maintain Buy, TP unchanged at S$3.13; potential upside to forecasts and TP from better-than-expected tourist arrivals and airline load factors

Comment on Results

1Q11 results within expectations. 1Q11 net profit was up by 10% yoy to S$44.3m, on the back of topline growth of 9% to S$382m. EBIT declined by 7% due to cessation of Jobs Credit (1Q10: S$6.1m). Excluding Jobs Credit, EBIT would have grown by c.8%. This was, fortunately, mitigated by a strong 62% growth in Associates/JV contribution to S$14.7m, largely by its Indonesia and Hong Kong operations.

UK reported strong 19% topline growth. Revenues grew from all segments with Gateway Services growing by 9.7% as aviation recovery continues to kick in with higher volumes. Notwithstanding the economic woes in UK, revenue grew by a strong 19% to S$81.3m, contributed by higher sales from Daniels’ juice and the “cut-fruit” categories.

Steady build up of cash to S$224m. Despite a delayed receipt of S$27m in receivables (which has since been collected), and final capex payments for its Coolport and Grimsby plants (S$16m), cash increased by S$29.1m from 4Q10.

Recommendation

Quarters ahead to show stronger growth. With Youth Olympic Games (YOG), F1, together with the ramp up at the Integrated Resorts, and pick up in yields/load factors for airlines, we should see better quarters ahead for SATS. 3QFY is also the traditionally strong quarter for Daniel’s in UK. Maintain Buy, TP unchanged at S$3.13. Potential upside to earnings and TP could lie in better-than expected tourist arrivals and yields/load factors of full cost airline carries, benefiting SATS’ aviation operations.