SATS – DBSV

Slow start

  • 1Q15 results slightly below estimates, dragged by higher costs and lower JV/associates contribution
  • Muted outlook due to overcapacity in the aviation sector and higher costs
  • Strong net cash position; 4.1% dividend yield to support share price
  • Maintain HOLD with TP adjusted slightly lower to S$2.90

Highlights

1Q15 earnings slightly below. 1Q15 earnings (S$43.3m, -6% yo-y) was slightly below our expectations, making up 22% of our full year forecast of S$196m. Flat revenue (S$435.2m, +0.2% y-o-y) along with increases in operating costs (+0.4%) and lower JVs/associate income (S$10.4m, -17%) led to the slower earnings Growth in gateway services revenue (+2% y-o-y), was dragged by lower food revenue (-0.9% y-o-y). Higher staff costs (+3%) resulted in a decline in operating margins (-0.3ppts, 9.1%), while lower regional cargo volumes led to a drop in JVs/associate income.

Strong net cash and free cash flow generation. Despite slower than expected earnings, SATS’ balance sheet and cash generating ability remained strong. Net cash increased to S$280m (from S$227m in 4Q14) while its operations generated S$31m in free cash flow which amounted to 72% of net income.

Our View

Lackluster outlook. We believe SATS’ growth outlook will be soft as the regional aviation market continues to see overcapacity. The rise in the number of LCCs will also undermine utilisation at its flight kitchens and growth in food solutions revenue. In addition, we see higher staff cost increases as dampeners to margin and earnings growth. We look forward to SATS growing its revenue streams away from aviation, into institutional catering (i.e. at Sports Hub) and maritime gateway services (i.e. at Marina Bay Cruise Centre).

Expect share price to be supported by dividend yield. Based on our FY15F DPS estimate of 13 Scts, SATS’ share price currently offers 4.1% dividend yield. Although earnings were slightly below our expectations, we do not believe this will undermine SATS’ DPS payout for this year. We therefore believe that SATS’ share price will be well supported by its dividend yield.

Recommendation

Maintain HOLD with lower S$2.90 TP. Following the slower than expected 1Q15 earnings, we trim our FY15F/FY16F earnings marginally by 1-2%. This resulted in a lower TP of S$2.90, based on average valuations using DCF (WACC 7.5%, t=1.5%) and PE (16x blended FY15F/FY16F EPS). Maintain HOLD.

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