SATS – OCBC

Strong execution in 1QFY11

1QFY11 results driven by broad-based growth. SATS Limited reported its 1QFY11 results last evening. Revenue came in at S$382.1m (+8.6% YoY, -2.2% QoQ), forming 24.1% of our FY11 sales forecast (22.9% of consensus), while PATMI reached S$44.3m (+9.7% YoY, -4.7% QoQ), representing 22.8% of full-year earnings estimate (21.6% of consensus). We note that the group enjoyed broad-based growth over the quarter, with aviation revenue (+9.1% YoY) driven by higher cargo throughput and passenger traffic, and non-aviation food business (+8.4% YoY) boosted by higher drinks and fruit sales from its UK operations. Better performances were also recorded by its ground handling associates in Hong Kong and Indonesia, leading to a strong 61.5% growth in contribution from overseas associates. As such, bottomline grew at a relatively faster pace than its topline, notwithstanding the absence of S$6.1m jobs credit benefit seen in 1QFY10. Excluding this benefit, we estimate that PATMI would have grown by 29.2% YoY (vs. 9.7% YoY growth as reported).

Positive outlook. Going forward, management expects its aviation business segment to improve further, in tandem with the economic recovery in Asia. Notably, passenger traffic is anticipated to grow in the coming quarters as full-service carriers continue to improve their yields and add more flights. In addition, cargo volumes are expected to grow, albeit at slower rate, mirroring the moderating economic growth projected in 2HCY10. Despite rising costs, SATS also added that its Singapore and UK food business are expected to remain stable in 2010.

Update on Coolport. On its perishable cargo handling centre, Coolport@Changi, management updated that the facility has commenced operations since 17 Jun and that the group is now in discussion with prospective customers for business opportunities in this area. Management currently expects Coolport to breakeven in 2-3 years. However, if it manages to secure big customers (where revenue is expected to be lumpy), the facility may break even as early as end-FY11.

Maintain BUY. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and generous dividend payouts. We are revising our FY11 forecasts upwards by 2.1-2.7% as we incorporate the quarterly results into our full-year projections. This raises our DCF-based fair value to S$3.30 from S$3.27 previously. Despite the share price jumping by 16.5% since our last report on 10 Jun, we continue to see an attractive upside potential of 11.5% on SATS. As such, we maintain our BUY rating on the stock.

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