SATS – Phillip

Fair Valuations

Company Overview

SATS Ltd is a provider of Airport Services & Food Solutions with a dominant presence in Singapore’s Changi Airport. The Group also has a network of JVs across Asia and holds a majority stake in TFK Corp, an inflight catering business based in Japan.

• 3.8% growth in underlying net profit

• Higher than expected revenue growth

• Staff cost surprised on the upside

• Margin pressures at the core business

• Downgrade to Neutral with TP of S$2.65

 

What is the news?

SATS announced a 3.8%y-y increase in underlying net profits on revenue growth of 13.6%. TFK’s revenue surged by 40% as the inflight catering arm benefitted from the low base effects off the Japan Earthquake in 1QFY12. The company’s balance sheet remains healthy with low gearing and strong cash balance of S$532mn.

How do we view this?

While SATS’s revenue performed better than expected, cost pressures from rising staff cost led to margin compression at the core business. The Group’s high labour expense of S$194mn led to the weakest profit margins at the core business in 2 years. As staff expenses are usually sticky in nature, we doubt profitability could improve meaningfully in the near term.

Investment Actions?

We downgrade our recommendation to Neutral. As we expect the company’s earnings recovery to be a year away, the stock’s potential upside could be limited. Following a surge in its stock price in anticipation of the special dividend payout, current valuation seems fair. SATS would go XD on 31st July with its dividend payout of 21cents per share.

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