SATS – Maybank Kim Eng
Await better entry point
- 4QFY3/14 net income of SGD42.6m (-7.8% YoY) fell short of market expectations due to elevated labour costs.
- The other disappointment: Lower-than-expected full-year DPS of 13 SGD cts (FY3/13: 15 SGD cts).
- Downgrade to HOLD with lower TP of SGD3.30 in view of near-term challenges that could cap share price upside.
SATS reported 4QFY3/14 net income of SGD42.6m (-7.8% YoY), which was below market expectations. Labour costs remained the key pressure point in 4QFY3/14, rising 5.3% YoY due to tight labour market in Singapore and Hong Kong. Full-year DPS was lowered to 13 SGD cts from 15 SGD cts (of which 4 SGD cts was special) translating to an 81% payout. Despite growth in workload, operating profit for the Gateway Services segment weakened to SGD13.8m in FY3/14 (-34%), while Food Solutions segment declined by a smaller quantum of 11% to SGD141.9m. The outlook appears mildly negative with management blaming it on rising costs and the overcapacity issue in the regional aviation market.
What’s Our View
While SATS remains a good exposure to the Changi Airport expansion story, we believe near-term earnings will remain weak as it struggles to contain escalating costs. While initiatives to reduce labour dependency are positive, they are unlikely to result in any material near-term benefits. The persistently weak air freight market will continue to weigh on its operations in Singapore and associates that are highly geared to the cargo business. Hence, we lower our FY3/15-16E EPS forecasts by 8%/7% and see significant downside risk to consensus estimates. Accordingly, we trim our DCF-based TP to SGD3.30 (WACC = 7.6%, tg= 1.0%) from SGD3.47 previously and downgrade our rating to HOLD. However, we see limited share price downside at 4% dividend yield, which is supported by its net cash position.