SATS – OCBC
Same story as 1QFY14
- Fewer meals served affect results
- 2HFY14 to show revenue decline
- Counter fairly valued at this juncture
2QFY14 results fall short
SATS’s 2QFY14 results were similar to the previous quarter. Revenue came in below our expectations (-2.0% YoY to S$452.1m) following declines in the food solutions segment, and EBITDA fell 11.6% YoY to S$65.7m as a result of higher staff costs. Fortunately, a better performance from its Indian and Indonesian associates managed to offset a weaker contribution from TFK and helped to arrest its PATMI decline to only 3.2% YoY to S$48.7m. Management declared an interim dividend of 5 S cents, similar to last year’s amount.
Weaker 2HFY14 outlook
Qantas’ relocation to Dubai was the main factor for SATS’s revenue decline in 1HFY14. As SATS experiences the full impact on a YoY basis, we are likely to see revenue fall further for 2HFY14. In addition, EBITDA margins (1QFY14: -0.3ppt oya to 13.9%; 2QFY14: -1.6ppt oya to 14.5%) have also fallen due to higher staff costs (wage increments from 1QFY14) and an increase in services to LCCs vis-à-vis premium carriers. This trend is likely to extend into 2HFY14.
Rising staff costs a longer-term concern
An area of longer-term concern is staff costs. With foreigners accounting for one in three workers, SATS qualifies under the Tier 3 dependency ceiling i.e. incurs the highest tier in foreign worker levies and faces further levy increases in Jul 2014/15. Although SATS has the ability to subsidise a portion of that increase due to cost escalation clauses, margins will still be depressed if foreign worker dependency is not reduced. To management’s credit, SATS has embarked on automation initiatives and we await further clarity on cost savings.
Counter fairly valued; maintain HOLD
Due to the weakened 2HFY14 outlook, we leave our fair value estimate unchanged at S$3.35 and maintain our HOLD rating. We foresee limited upside at this juncture and on-going tapering expectations may have a negative impact on dividend-yielding counters such as SATS.