SATS – CIMB

Inching up

We continue to like SATS for its 4.9% yield, strong balance sheet with net cash of S$270m and encouraging volume growth in Changi Airport. Maintain Outperform.

2Q14’s core net profit was broadly in line with our expectations and consensus’s. 1H14 formed about 45% of our full-year forecast. SATS declared a 5 Scts interim dividend, similar to 1H13. We have raised our target price to S$3.88, after rolling forward to CY15, still based on 17.7x P/E, or +1 s.d. of its five-year mean. Catalysts could come from a rebound of earnings in TFK and stronger dividend payout.

TFK rebound qoq

The yoy weakness in revenue (-2%), already felt in 1Q14 was mainly due to the impact of the weak JPY currency and diversion of Qantas long-haul flights to Dubai from Singapore. Hence, we think it is more relevant to analyse SATS’s qoq performance. Revenue grew 4% qoq in 2Q14, thanks to broad-based growth across gateway and food solutions. TFK’s revenue (contributing about 16% of SATS’s revenue) rose 9% qoq due to 1) stronger outbound traffic and the range-bound SGD/JPY movement. In 1Q14, the SGD/JPY averaged 78.4, but improved slightly to 78.0 in 2Q14

Costs well controlled, margin inched up qoq

EBIT margin improved qoq to 10.3% from to 9.4% in 1Q14, but was weaker yoy (2Q13: 11.2%). Staff cost (about 49% of total expenditure), up 1% yoy, seemed well controlled, although management highlighted that it could weigh on margins given higher foreign manpower levies (SATS’s current foreign/local staff ratio is 1:3). We keep our FY14 EBIT margin of 10.7% (FY13: 10.5%).

Strong operating statistics

Operating statistics in 2Q14 improved for all sectors. Passengers handled grew 4.5% qoq to 11.1m while flights handled grew 2.8% qoq to 33.3k, in line with the high volume at Changi Airport. Unit meals and gross meals produced were up 3% qoq to 5.2m and 6.7m respectively, thanks to new routes introduced by airlines and additional Qantas flights between Singapore and Australia.

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