Weaker Japan Operations Weigh On Revenue

SATS posted a 1QFY14 revenue of SGD434.5m (-0.8% y-o-y) on weaker contribution from its TFK subsidiary and a PATMI of SGD46.2m (+11.9% y-o-y). Excluding the writeback for prior year tax provisions and an impairment loss during 1QFY14, PATMI would have risen by 6.8% y-o-y. As passenger traffic growth moderates, Management remains focused on managing costs and raising productivity. Maintain NEUTRAL.

Revenue slightly below expectations. SATS’ 1QFY14 revenue was slightly below our expectations, although PATMI was in line – due to the SGD3.8m writeback of the prior year’s tax provisions and a SGD1.7m oneoff impairment loss. The decline in the JPY, as well as a lower load factor for the Japan-China route, had led to lower business volume for its TFK Corporation subsidiary. Despite that, TFK remained profitable during the quarter under review. Meanwhile, the diversion of Qantas’ European flights to Dubai had an impact on SATS’ overall meal volume.

Outlook stable, but expect challenges. The addition of new flight destinations by airlines, an increase in airline budget for in-flight services offerings and the growth in the low cost carrier segment could help boost SATS’ revenue. However, with the global economy still uncertain, passenger traffic numbers are expected to slow down somewhat. We expect this factor, coupled with the ongoing downtrend for airfreight, to translate into a challenging outlook for the aviation business. The weaker JPY and TFK’s lower business volumes may persist over the next few quarters, although SATS has maintained its positive long-term view on its investment in Japan.

Lower earnings estimate, TP unchanged. We have adjusted our revenue estimate in anticipation of lower revenue growth. We have also tweaked our staff cost assumptions, as SATS has raised some wages. This has prompted us to revise our FY14F PATMI estimates downwards to SGD215.6m. Maintain NEUTRAL.

Weaker Japan Operations Weigh On Revenue

SATS posted a 1QFY14 revenue of SGD434.5m (-0.8% y-o-y) on weaker contribution from its TFK subsidiary and a PATMI of SGD46.2m (+11.9% y-o-y). Excluding the writeback for prior year tax provisions and an impairment loss during 1QFY14, PATMI would have risen by 6.8% y-o-y. As passenger traffic growth moderates, Management remains focused on managing costs and raising productivity. Maintain NEUTRAL.

Revenue slightly below expectations. SATS’ 1QFY14 revenue was slightly below our expectations, although PATMI was in line – due to the SGD3.8m writeback of the prior year’s tax provisions and a SGD1.7m oneoff impairment loss. The decline in the JPY, as well as a lower load factor for the Japan-China route, had led to lower business volume for its TFK Corporation subsidiary. Despite that, TFK remained profitable during the quarter under review. Meanwhile, the diversion of Qantas’ European flights to Dubai had an impact on SATS’ overall meal volume.

Outlook stable, but expect challenges. The addition of new flight destinations by airlines, an increase in airline budget for in-flight services offerings and the growth in the low cost carrier segment could help boost SATS’ revenue. However, with the global economy still uncertain, passenger traffic numbers are expected to slow down somewhat. We expect this factor, coupled with the ongoing downtrend for airfreight, to translate into a challenging outlook for the aviation business. The weaker JPY and TFK’s lower business volumes may persist over the next few quarters, although SATS has maintained its positive long-term view on its investment in Japan.

Lower earnings estimate, TP unchanged. We have adjusted our revenue estimate in anticipation of lower revenue growth. We have also tweaked our staff cost assumptions, as SATS has raised some wages. This has prompted us to revise our FY14F PATMI estimates downwards to SGD215.6m. Maintain NEUTRAL.

1QFY14 profit in line despite lower revenues

• 1QFY14 net profit was boosted by a tax write-back
  
• Revenues slipped due to lower contributions from TFK and Qantas Airways
  
• EBIT margins improved marginally on the back of lower operating costs
  
• Maintain HOLD, TP is intact at S$3.29
  

Highlights

1QFY14 profit in line. Net profit grew 11.9% to S$46.2m while revenues dipped 0.8% to S$434.5m. There was a S$3.8m tax writeback in the quarter and it booked S$1.7m impairment charge on assets held for sale. Excluding these items, net profit would have registered lower 6.8% y-o-y growth to S$44.1m.

Lower revenues due to TFK, lower meals uplift. 1QFY14 revenues were affected by lower contribution from food solutions (-5.6%), partly offset by higher gateway contribution (+7.9%). The weaker food solutions contribution was due to a 22% drop in TFK’s revenues as a result of a weaker yen and lower load factor amid strained Sino-Japan relations. Food solutions revenue was also affected by a 6.6% dip in unit meals uplifted, largely a result of Qantas moving its European flights to Dubai, from Singapore. Qantas redrawn about 52 flights/ week, which accounts for about 2% of total flights handled by SATS.

EBIT margins improve marginally to 9.4%. The dip in revenue was mitigated by lower operating expenses (-1.2%). The drop in opex was led by lower raw material costs (-2.8%), depreciation (-14.7%), premise and utilities expenses (-7.6%), and others (-2.5%).

Our View

Limited re-rating due to weak outlook. 1QFY14 earnings were in line at c.22% of our FY14F profit, similar to the year-ago quarter. There is little scope for share price upside in view of moderating passenger traffic growth and declining airfreight volume. However, this should be mitigated by its commitment to manage costs, as well as relatively attractive yields.

Recommendation

Maintain HOLD, TP S$3.29. SATS is currently trading at +1 SD of its historical PE band, in line with regional/global peers’ average. Our TP is the average of the values derived from our DCF model (WACC 7.7%, t=1.5%) and PE valuation model (16x FY14/15 EPS).