SATS – Kim Eng

Decent 1Q despite Cost Pressures

1QFY3/13 showed robust revenue growth, TFK recovery. SATS reported a decent set of 1QFY3/13 results, posting a 3.8% YoY improvement in underlying NPAT from continuing operations to SGD41.3m. This was contributed by a healthy 13.6% increase in revenue to SGD437.9m. Revenue growth was led by both Gateway Services (+SGD11.6m, +8.1%) and Food Solutions (+SGD40.7m, +16.9%) segments. TFK saw a +40.7% YoY recovery in revenue from the Japanese March 11 disasters to SGD83.7m. Profits were also boosted by a greater contribution from its Associates/JVs (+SGD0.3m, +2.6%).

Keeping a lid on Cost pressures. Rising labour costs (Fig 2) have been cited as a concern by SATS, as their 13.4% YoY increase in staff costs contributed to their total group expenditure rising 12.6% YoY to SGD398.6m. However, management maintains a sharpened focus on productivity improvements to keep such cost pressures manageable. Their cost of raw materials have also increased significantly (+20.6%), but these were largely in line with revenue increases from their food solutions business (+16.9%).

The best has yet to come. SATS stated that TFK was still not operating at its pre-March crisis capacity, and we believe further progress in TFK’s recovery could provide further earnings upside for the Group. In addition, we should see further growth on the domestic front underpinned by robust passenger and aircraft arrivals at Changi Airport.

Maintain BUY, Ex-Div on 31 Jul. We maintain our optimism on SATS for its exposure to robust growth from domestic visitor arrivals and further TFK recovery. Its earnings resilience, strong cash-generating business and healthy balance sheet continue to support attractive forward dividend yields of 6-7%. Management does not rule out paying another special dividend with their excess cash even after the most recent bumper dividend of SGD0.21* per share going Ex-Div on 31 Jul. Maintain BUY, with Target Price pegged to 17x FY3/13 PER, 1 SD above its historical mean.

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