SATS – DBSV

Expect a seasonally stronger 2H

At a Glance

• 2Q11 within expectations with net profit +11% yoy

• Lower EBIT (-4.2%) was mitigated by higher associate contribution (+51%)

• Stronger 2H on further pick up in activities (air travel, airlines yields/load factor, Daniel’s food business)

Maintain Buy, S$3.13 TP.

Comment on Results

2Q11 within expectations. 2Q11 net profit was up by 10.5% yoy to S$45.2m on the back of revenue growth of 11% to S$401.2m. EBIT declined by 4% as a result of higher cost of raw materials due to rising food prices. However, this was mitigated by stronger Associates/JV contribution of S$15.9m (+51%) compared to S$10.5m in 2Q10. More gateway activities and better margins from food solutions contributed to the increase in Associate/JV income.

Lower EBIT margins cushioned by better Associates/JV performance. EBIT margins came in lower (-1.6ppt yoy) as prices of raw materials increased 15% from S$94.1m to S$108m. Raw material price increase was mainly due to higher food prices in the form of fruits, dairy, rice, and meat products, affected by poorer harvest and natural disasters. Associates/JV however performed strongly (+51%) with higher gateway activities and better margins from food solutions, mitigating the impact of higher raw material prices.

Recommendation

Expect a seasonally stronger 2H11. We are expecting a seasonally stronger 2H on further pick up in activities on increased air travel, airlines yields/load factor improvement, as well as better contribution from SATS’s Daniel’s food business. However, rising food prices could be a dampener on our earnings estimates although we believe that the effects of rising food prices will be minimised through SATS’s diversified supply base. We are expecting the associates/JV to turn in better 2H performance as air travel improves going forward, and therefore believe that the effects of higher food prices and increased air travel in 2H will cancel out each other. Interim dividend of 5c was declared. Maintain Buy, TP unchanged at S$3.13.

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