Subdued operations

At 22% of our FY15 numbers, 1QFY3/15 core profit of S$43m (-9% yoy) was broadly in line with our expectations and consensus. Management blamed the tragedies of MH370 and the political unrest in Thailand for the weak Changi operating data. Margin strain continued despite SATS’s efforts to reduce its headcount. Overall profits were lifted by lower-than-expected taxes. We keep Reduce as we think that valuation is stretched at 17x CY15, against muted 8% growth and downside risks from potential for further margin contraction. We maintain our target price, still based on 16x CY15 P/E (5-year mean).

Operating data nothing to shout about

TKF contribution was weaker-than-expected as revenue dropped 7% qoq and 9% yoy to S$59m. The lower revenue was mainly due to weaker utilisation in Narita kitchen slots (Yen/S$ was relatively stable from Mar 14 to Jun 14). Flights handled rose 2.5% yoy to 33,170 units in 1Q15 due to the increase in LCCs volume, but the number of passengers handled was muted at 10.7m as airlines’ load factors remained weak. Unit meals volume was stagnant at 5.1m – a sustained weakness due to Qantas flight withdrawals.

Margin pressure is here to stay

EBITDA margin shrank to 12.8% from 14% in 4Q14 and 1Q14 despite SATS’s efforts to reduce its headcount during the quarter. Actual quantum was undisclosed but SATS had 14,611 staff as of end-FY14. 1Q15 staff costs rose 2% yoy to S$204m, accounting for about 51% of its operating costs (50% in 1Q14). Margin improvement could take multiple years, according to the management. Associates’ contribution was lower-than-expected due to weaker cargo volumes in 1) greater China on slower growth and 2) Indonesia due to the elections.

Benefits from the growing Asian aviation theme? Not soon

While we believe that SATS would benefit from the growth in Asian travellers, we think that this could be a long-term (5-10 year) story. Contributions from non-aviation themes such as the Singapore Sports Hub and Marina Bay Cruise Centres are likely to be relatively immaterial in the medium term. We would look for buying opportunity if 1) the margin pressure eases or 2) the share price weakens or 3) Changi Airport reports more positive operating data.

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