SATS – DBSV

Grounded by weak Yen and high staff costs

  • 3Q14 results below expectations; net profit dropped by 8.7% to S$42.9m
  • Weaker contribution from Food Solutions arising from weaker JPY, higher staff costs
  • Trim forecasts by 9%/2%
  • Maintain HOLD, TP revised to S$3.25

3Q14 results underperform on weaker JPY, higher staff costs. 3Q14 net profit dropped by 8.7% y-o-y to S$42.9m, which was below our expectations. The Group’s revenue slipped by 1.1% to S$465.5m, largely on weaker contribution from its Food Solutions’ segment (-3.9%), mitigated partially by higher contribution from Gateway Services (+4.3%). Food Solutions’ revenue was impacted by JPY depreciation, as well as fewer unit meals served (-5.7%) in 3Q14.

EBIT margins weakened by 0.9ppt to 9%. Operating expenses dipped by a slower pace vis-à-vis topline, largely on the back of higher staff costs. The Group continued to be impacted by higher worker levies. As a result, EBIT margins dipped by 0.9ppt to 9% (3Q13: 9.9%).

Trim forecasts by 9%/2%. We cut our net profit forecasts by 9%/ 2% for FY14F/15F, on the back of a slower topline growth assumption due to a weaker JPY. Our FY15F downward revision is mitigated by the inclusion of contribution from its proposed Singapore Cruise Centre acquisition, which is currently being reviewed by the Competition Commission of Singapore. Management remains hopeful for an outcome by May 2014.

Maintain HOLD, TP at S$3.25. Our TP is adjusted down to S$3.25, due to lower earnings forecasts but mitigated partially, as we roll over our valuation base to FY15F. SATS trades at c.15.9x FY15F PE, which is +0.5 std deviation above its historical mean, and largely in line with regional peers. We believe downside to its share price should be muted, with its strong cash generation and relatively attractive dividend yield of c.5%. Maintain HOLD.

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