SATS – DBSV

No surprises, cost pressures remain

At a Glance

4Q/FY11 results within expectations

6 Scts final and 6 Scts special dividends proposed

Trimmed FY12/13F by 5.6%/1.4% on further increases in cost inflation and TFK operations, offset partially by higher JV/Associates contribution

Maintain Hold, TP adjusted marginally to S$2.91

Comment on Results

4Q/FY11 within expectations. SATS’ 4Q net profit came in at S$50.5m, capping FY11 at S$191.4m (+5.6%), which were within consensus and our expectations. 4Q topline at S$504.9m (+29%) was helped by S$72.6m revenue contribution from recently acquired TFK Corporation (TFK) and organic growth (S$432.2m, +10.7%). EBIT margins fell marginally by 0.3ppt to 10% as staff costs (S$193.7m, +35%) and raw material costs (S$143.9m, +41%) rose by a faster clip on consolidation of TFK’s operations, absence of Jobs Credit and cost inflation. Net profit was helped by strong contribution from its JVs/Associates (S$15.3m, +18%) arising mainly from maiden consolidation from its Air India-SATS JV.

Final/ Special dividend of 6 Scts each, full year at 17 Scts. Management has proposed a final and special dividend of 6 Scts each, bringing full year DPS to 17Scts (interim DPS: 5 Scts) versus FY10’s 13 Scts (5 cts interim, 8 Scts final). This equates to a payout of 98%. With the special DPS payout, management has indicated its desire to improve its capital structure, and return excess cash to shareholders. Even with the payout, the Group is still in a net cash position.

Recommendation

Cost pressures remain; FY12F/13F trimmed by 5.6%/ 1.4%. We expect to see cost pressures continue, especially from higher labour (FY12F: 38.9% of revenue) and raw material costs (28.2%). While management maintained that TFK would not have a material impact on the Group’s performance in FY12F, we expect overall growth to be affected at least partially, especially with the uncertainty over the time period for travel to revert to normalcy post Japan’s quake/ nuclear situation. As such, we have trimmed our earnings marginally by 5.6%/ 1.4% for FY12F/ 13F.

Maintain Hold, TP: S$2.91. We maintain our Hold recommendation with a revised TP of S$2.91, based on the average of PE (14x FY12F) and DCF (WACC: 7.7%, t=1%). We believe its reasonable dividend yield of c.5% should support share price.

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