Special dividends likely

Company Overview

SATS Ltd is a provider of Airport Services & Food Solutions with a dominant presence in Singapore’s Changi Airport. The Group also has a network of JVs across Asia and holds a majority stake in TFK Corp, an inflight catering business based in Japan.

• Margin pressures & loss on disposal of Daniels Group contributed to 25% decline in net profits

• TFK Corp in the black for the quarter

• Factored in special dividends of 20cents for FY12E

• Maintain Buy with revised TP of S$2.76

What is the news?

SATS announced headline profit decline of 25% in 3QFY12 due to margin pressures and loss on disposal of Daniels Group of S$5.5mn. Revenue was little changed when compared to figures prior restatement in the quarter, which removed contributions from Daniels Group in 3QFY11. The lack of contribution from Daniels Group (3QFY11: S$107mn) was offset by contributions from TFK Corp (3QFY12: S$82mn) and organic growth from SATS’s core business. Underlying Net Profit from continuing operations disclosed by SATS declined by 8.6%y-y from S$47.8mn to S$43.7mn.

How do we view this?

The low profit margin for the quarter is partly a result of distortions due to low profit contributions from TFK Corp that was acquired in Dec 2010. Net profit for the quarter is in line with our forecasts. In the quarter, SATS received cash from the sale of Daniels Group, which led to a cash build up. Hence, we explicitly modeled in special DPS of 20cents, on top of ordinary final DPS of 6cents that could be announced at the end of the year. We maintain our view that holding surplus cash would hurt the efficiency of SATS’s balance sheet and management would likely dish out excess cash to shareholders.

Investment Actions?

We maintain our Buy recommendation on SATS with the view that earnings would likely improve meaningfully in FY13E and the likelihood of a special dividend payout will offer good share price support in the near term. Current market price translates to a forward yield of 13%.

No reprieve anytime soon

Falling margins and profit contraction in 3Q12 reaffirm our bearish stance on SATS. Do not expect a reversal of fortune anytime soon. The disposal of Daniels implies the loss of an income stream, while start up costs for ICT will further eat into profits.

9M12 earnings met our expectations at 73% of FY but fell short of consensus at just 69%. We cut our FY12-14 EPS by up to 8% and our TP, still based on 9.1x CY13 P/E, slips accordingly. Maintain Underperform as SATS’s lackluster outlook does not deserve its current rich valuation.

Shrinking margins

We foresee that SATS will continue to succumb to margin pressure over the next few quarters. Margin contraction continued to plague the group in 3Q12 with net profit margin falling to its lowest level in eight years, wiping out revenue growth and resulting in a 25% yoy decline in profits. The group blamed this on higher raw material costs, energy and other expenses. Poor associates’ performance resulting from weak cargo demand further dampened earnings.

Tepid outlook

We anticipate further margin pressure over the next few quarters arising from start-up costs needed for the International Cruise Terminal, mainly on the hiring front. Furthermore, the lacklustre aviation industry outlook implies subdued pricing power for SATS. Interestingly, management cited this as a more pressing factor weighing its pricing power rather than competition from new entrant ASIG, which according to management has not captured any market share to date.

Rich valuations unjustified

We cut our FY12-14 EPS by up to 8% to reflect higher operating costs. Recent results certainly do not justify a more positive view. Despite a challenging outlook, SATS has rallied in-line with the market and is trading near its 8-year P/E and P/BV mean. We believe that its rally will soon peter out as results show that earnings risks have yet to be fully reflected.

No reprieve anytime soon

Falling margins and profit contraction in 3Q12 reaffirm our bearish stance on SATS. Do not expect a reversal of fortune anytime soon. The disposal of Daniels implies the loss of an income stream, while start up costs for ICT will further eat into profits.

9M12 earnings met our expectations at 73% of FY but fell short of consensus at just 69%. We cut our FY12-14 EPS by up to 8% and our TP, still based on 9.1x CY13 P/E, slips accordingly. Maintain Underperform as SATS’s lackluster outlook does not deserve its current rich valuation.

Shrinking margins

We foresee that SATS will continue to succumb to margin pressure over the next few quarters. Margin contraction continued to plague the group in 3Q12 with net profit margin falling to its lowest level in eight years, wiping out revenue growth and resulting in a 25% yoy decline in profits. The group blamed this on higher raw material costs, energy and other expenses. Poor associates’ performance resulting from weak cargo demand further dampened earnings.

Tepid outlook

We anticipate further margin pressure over the next few quarters arising from start-up costs needed for the International Cruise Terminal, mainly on the hiring front. Furthermore, the lacklustre aviation industry outlook implies subdued pricing power for SATS. Interestingly, management cited this as a more pressing factor weighing its pricing power rather than competition from new entrant ASIG, which according to management has not captured any market share to date.

Rich valuations unjustified

We cut our FY12-14 EPS by up to 8% to reflect higher operating costs. Recent results certainly do not justify a more positive view. Despite a challenging outlook, SATS has rallied in-line with the market and is trading near its 8-year P/E and P/BV mean. We believe that its rally will soon peter out as results show that earnings risks have yet to be fully reflected.

SATS Q3 profit falls 25.4% on 32.3% higher revenue

Loss of $5.5m on sale of UK food business, JVs’ falling contribution cited

SATS Ltd reported a 25.4 per cent drop in net profit to $38.2 million for the third quarter, from $51.2 million a year earlier, due to rising costs, loss from the disposal of its UK-based food business, falling contribution from joint ventures & associates, and a weaker US dollar.

Revenue grew 32.3 per cent to $442.3 million, from $334.3 million. Earnings per share fell to 3.5 cents from 4.6 cents a year earlier.

During the quarter, SATS recognised a loss of $5.5 million on the disposal of UK-based Daniels.

Food solutions revenue rose 49.4 per cent to $285.3 million, due mainly to the consolidation of Tokyo Flight Kitchen (TFK) which contributed $82 million to its revenue. Excluding TFK, food solutions revenue improved 6.5 per cent, led by more airline meals served during the quarter. Excluding TFK’s expenditure of $80.5 million, group expenditure rose at a lower rate of 9.2 per cent to $318 million, attributed to higher staff, raw material and utilities costs.

In October 2011, SATS announced the disposal of Daniels Group (Daniels) in the UK. The loss on disposal of Daniels was $5.5 million. After adjusting for Daniels’ results and one-off M&A expenses for TFK acquisition incurred in Q3 FY11, SATS’ underlying net profit from continuing operations was $43.7 million.

A combination of weaker cargo volumes by associates (led by Hong Kong) saw SATS’ share of profits of associates and JVs fall 15.7 per cent to $12.9 million.

For the nine months ended December 2011, SATS posted net profit of $120.8 million, down 14.1 per cent from $140.7 million a year earlier. Revenue rose 31 per cent to $1.25 billion. Higher expenditure saw group operating profit drop 3.5 per cent or $4.4 million to $120.7 million. Underlying net profit from continuing operations, after adjusting for TFK and Daniels, dropped at a lower rate of 5.6 per cent to $129.9 million.

As at end-December 2011, SATS’ total assets stood at $2.13 billion, down 7.8 per cent from nine months earlier, while cash balance rose from $296.1 million to $421.3 million.

Equity attributable to shareholders was $1.47 billion, down 3.6 per cent from March 31 2011, due mainly to dividend payments of $188.4 million which were partially offset by profits recorded in the first nine months of the current year. Debt to equity ratio remained steady at 0.12 times.

During the third quarter, SATS saw the number of flights handled and unit services grow 13.3 per cent and 10.5 per cent respectively year-on-year, underpinned by the seasonally high travel season from October to December 2011. Gross meals increased by 4.1 per cent and unit meals by 3 per cent, in line with the higher passenger traffic recorded during the quarter, while cargo throughput went up slightly by 1.6 per cent.

The company is cautious about the final quarter citing the seasonally low travel period between January and March.

It does not expect its Singapore International Cruise Terminal (ICT) venture, where it has a 60 per cent stake in a partnership – with Creuers Cruise Services holding the remaining share – to be profitable in its first year after operations start. The company, which invested $3.6 million in the venture, pointed out that most cruise operators plan their itineraries more than a year in advance. But it remains confident that, given its ability to take larger ships, the ICT will prove to be a profitable venture in the medium to longer term.

SATS shares closed trading yesterday at $2.39, up four cents.

SATS Q3 profit falls 25.4% on 32.3% higher revenue

Loss of $5.5m on sale of UK food business, JVs’ falling contribution cited

SATS Ltd reported a 25.4 per cent drop in net profit to $38.2 million for the third quarter, from $51.2 million a year earlier, due to rising costs, loss from the disposal of its UK-based food business, falling contribution from joint ventures & associates, and a weaker US dollar.

Revenue grew 32.3 per cent to $442.3 million, from $334.3 million. Earnings per share fell to 3.5 cents from 4.6 cents a year earlier.

During the quarter, SATS recognised a loss of $5.5 million on the disposal of UK-based Daniels.

Food solutions revenue rose 49.4 per cent to $285.3 million, due mainly to the consolidation of Tokyo Flight Kitchen (TFK) which contributed $82 million to its revenue. Excluding TFK, food solutions revenue improved 6.5 per cent, led by more airline meals served during the quarter. Excluding TFK’s expenditure of $80.5 million, group expenditure rose at a lower rate of 9.2 per cent to $318 million, attributed to higher staff, raw material and utilities costs.

In October 2011, SATS announced the disposal of Daniels Group (Daniels) in the UK. The loss on disposal of Daniels was $5.5 million. After adjusting for Daniels’ results and one-off M&A expenses for TFK acquisition incurred in Q3 FY11, SATS’ underlying net profit from continuing operations was $43.7 million.

A combination of weaker cargo volumes by associates (led by Hong Kong) saw SATS’ share of profits of associates and JVs fall 15.7 per cent to $12.9 million.

For the nine months ended December 2011, SATS posted net profit of $120.8 million, down 14.1 per cent from $140.7 million a year earlier. Revenue rose 31 per cent to $1.25 billion. Higher expenditure saw group operating profit drop 3.5 per cent or $4.4 million to $120.7 million. Underlying net profit from continuing operations, after adjusting for TFK and Daniels, dropped at a lower rate of 5.6 per cent to $129.9 million.

As at end-December 2011, SATS’ total assets stood at $2.13 billion, down 7.8 per cent from nine months earlier, while cash balance rose from $296.1 million to $421.3 million.

Equity attributable to shareholders was $1.47 billion, down 3.6 per cent from March 31 2011, due mainly to dividend payments of $188.4 million which were partially offset by profits recorded in the first nine months of the current year. Debt to equity ratio remained steady at 0.12 times.

During the third quarter, SATS saw the number of flights handled and unit services grow 13.3 per cent and 10.5 per cent respectively year-on-year, underpinned by the seasonally high travel season from October to December 2011. Gross meals increased by 4.1 per cent and unit meals by 3 per cent, in line with the higher passenger traffic recorded during the quarter, while cargo throughput went up slightly by 1.6 per cent.

The company is cautious about the final quarter citing the seasonally low travel period between January and March.

It does not expect its Singapore International Cruise Terminal (ICT) venture, where it has a 60 per cent stake in a partnership – with Creuers Cruise Services holding the remaining share – to be profitable in its first year after operations start. The company, which invested $3.6 million in the venture, pointed out that most cruise operators plan their itineraries more than a year in advance. But it remains confident that, given its ability to take larger ships, the ICT will prove to be a profitable venture in the medium to longer term.

SATS shares closed trading yesterday at $2.39, up four cents.