SATS – Phillip

Food for Thought

Concerns over rising raw material prices is likely to be the main cause of a pullback in the share price

SATS should be able to pass on cost increase for most of its food business

Ability to pay out consistent dividends not under threat

Maintain Buy recommendation with target price of S$3.30.

Dip in share price. We believe that the share price underperformance in the past week could be attributed to two factors: slightly below consensus 3QFY11 results and rising food prices. Prior to the release of results, consensus PATMI estimate was at S$57.3mn (PSR est.: S$51.7mn) as compared to actual results of S$51.2mn. We believe that the quantum of earnings disappointment is not significant as expectations were missed by only 5.2% after adjusting for one off M&A charge of S$3.3mn. We believe that the main cause of a sell down in the stock of SATS is associated with concerns over rising food cost. Hence, we will discuss the implications of rising food prices for SATS in greater detail in this report.

Food Solutions business. Over the past year, Food Solutions business made up 66% of the Group revenue and raw material cost (mainly raw food cost) accounted for 30% of the Group’s total operating cost. After the acquisition of TFK Corporation (consolidated from 4QFY11), Food Solutions business will encompass an even bigger portion of the revenue base of SATS. Therefore, increase in food cost will have a significant impact on the profitability of the Group.

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