Staff Costs Drag 3Q14 Profit

SATS recorded lower food revenue y-o-y, largely due to the Qantas and JPY impact, which was somewhat offset by higher gateway revenue as passenger traffic at Changi Airport continued to grow. Proportionately higher operating expenses dragged down PATAMI growth. While SATS’ long-term outlook is encouraging, we expect near-term headwinds with regards to staff costs. Maintain NEUTRAL and a SGD3.43 TP.

Revenue growth impacted by forex. SATS’ 3Q14 PATAMI slid 8.7% to SGD42.9m, on the back of a 1.1% decline in revenue. The revenue decline was largely due to a dip in food revenue, after Qantas pulled out its longhaul flights from Changi Airport in 1H CY13. On a q-o-q basis, the impact of Qantas’ departure is stabilising, but food revenue is likely to remain under pressure from the depreciating JPY. Gateway revenue is likely to see moderate growth, backed by increasing passenger traffic at Changi Airport.

More efforts to lower operating costs. In order to mitigate the expected rise in manpower costs, SATS is actively looking to raise productivity, through automation and the use of technology. While no further details were given, management highlighted that it will put more efforts into improving productivity, such as building more passenger self-check-in booths at the terminals.

Positive on long-term prospects. SATS’ proposed acquisition of the Singapore Cruise Centre (SCC) is currently under the second review by the Competition Commission. Passenger traffic at the Marina Bay Cruise Centre Singapore (MBCCS) has been growing, although the volume is still small at the moment. Should it become the owner of both cruise centres, SATS would stand to benefit from the growing cruise industry in Singapore. The company, which is also the largest caterer in Singapore, is poised to benefit once the Sports Hub starts operations, likely in 2H CY14. In the near term, higher staff costs could slow profit growth.

Lowering PATAMI estimates. We lower our FY14 PATAMI estimate to SGD194m, from SGD217m. Consequently, we trim our DCF-based TP to SGD3.43 (from SGD3.49). Maintain NEUTRAL.

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