SATS – MayBank Kim Eng

Look Beyond The Near Term Headwinds

Weak set of numbers. SATS reported a fairly weak set of results with net income of SGD48.7m (-3.2% YoY, +5.4% QoQ). Revenue declined by 2%, largely due to lower contribution from TFK Corp. The core business continued to suffer from the impact of rising labour cost in Singapore. The saving grace was a 14% improvement in contribution from its associates in India and Indonesia. We trim our FY03/14-16 estimates by less than 2% to account for the lower-than-expected contribution from TFK Corp. and tweak our DCF-based TP to SGD4.00.

Lower inflight catering volume as expected. 2QFY03/14 unit meals produced in Singapore declined by 4.2% YoY as the inflight catering business was affected by the shifting of Qantas’ long-haul hub from Singapore to Dubai. While negative, this is already in our forecasts and is a well-cited fact.

Look beyond near-term headwinds at TFK. Meals volume in Japan was also lower (-4.5% YoY) due to continued tension between Japan and China. This coupled with the translational impact of weaker JPY against the SGD (-19% YoY) led to lower contribution by TFK. While facing near-term headwinds, the unit remained profitable and we expect growing contributions in the long term. The Japanese government aims to triple visitor arrivals to 30m by 2030 (2012: 8.4m) and we expect the aviation industry to be a natural beneficiary. Furthermore, Japan’s successful bid to host the Olympic Games in 2020 will provide a medium-term kicker.

Maintain BUY, TP: SGD4.00. We maintain our BUY rating on SATS as it is well positioned to benefit from Changi Airport’s ongoing expansion for growth. Furthermore, we believe investors should look beyond current poor performance. With the highly cash generative nature of its business, we see room for higher payout as it optimises its capital structure. The acquisition of Singapore Cruise Centre (SCC) will strategically position SATS as a direct proxy to the tourism growth story in Singapore.

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