Lower Revenue In 2Q14

SATS’ 2Q14 revenue dipped 2% y-o-y to SGD452.1m, largely due to lower food revenue. Operating margins remained under pressure, leading to a 3% y-o-y decline in PATAMI. The expected y-o-y weakness in the JPY would mean lower revenue contribution from TFK. SATS’ share price has risen 9% over the past month and our DCF-based TP of SGD3.49 now presents a 3% upside. Downgrade to NEUTRAL.

Lower food revenue due to TFK and Qantas. The lower load factor for the Japan-China route due to strained Sino-Japanese relationships led to lower business volume at TFK. Nevertheless, the latter remained profitable during the quarter. Going forward, the JPY is likely to remain weak y-o-y. While the diversion of Qantas’ European flights from Singapore to Dubai continued to pressure 2Q14 revenue, management does not expect further negative impact on a q-o-q basis moving forward.

Aviation business likely to be challenging. Passenger traffic at Changi is expected to record moderate growth, while airfreight demand will likely remain weak. The silver lining is the addition of new flight destinations by airlines while the growth in the low-cost carrier (LCC) segment could boost business volume. Higher staff costs will continue to weigh on margins, given a rise in foreign worker levies. Meanwhile, its acquisition of Singapore Cruise Centre is on track. Once completed, it would boost revenue growth and reduce SATS’ reliance on the aviation industry.

Lower estimates; TP unchanged. With JPY expected to remain weak going forward, we lower our assumptions on TFK’s revenue contribution. Hence, we arrive at a slightly lower PATAMI estimate of SGD215m (previously SGD222m) and keep our DCF-based TP of SGD3.49, pegged to a P/E of 18x FY14F earnings. SATS’ share price has risen 9% over the past one month following its acquisition announcement, thus leaving little upside to our TP. Downgrade to NEUTRAL.

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