Possibility of higher dividends

Slightly below. SATS’ 3Q12 headline net profit came in at $38.2m, down 25.4% but underlying profit was an 8.6% decline to $43.7m after adjusting for the disposal of Daniels, including a one-off write-down of $5.5m. Core earnings were slightly below our forecasts, as TFK’s recovery was slower than expected, and costs have not come off significantly as yet. On balance, however, the numbers were still solid. SATS remains a Buy with a target price of $2.70. Basic dividend yield is attractive at 5%, and we do not exclude the possibility of a special dividend derived from the proceeds from the sale of Daniels.

Revenues remain robust. 3Q12 revenue grew 32.3% YoY. On a sequential basis, revenue grew by 4.2%. Gateway services notably recorded a 10.5% YoY growth in revenue due to the growth in flights, while revenue from food solutions rose 49% YoY. TFK’s revenue was $82m for 3Q12. This remained a steady improvement over 2Q, as operations continue to recover from the Japan earthquake. Operating profit remained in the $1.5m range, as the recovery in earnings is taking longer than we had expected. Despite this, we expect TFK to be a far more significant contributor to earnings in the future.

Costs flat, but not softened. Staff costs have been well contained despite the growth in revenue. Raw material costs have also remained flat, but this is actually a slight disappointment as our expectation was that food prices would start to come off by now. However, management remains optimistic that raw material costs can still be contained with better management for the moment. We still anticipate some softening of this in the coming months.

Target price still $2.70. We adjust our FY12 forecasts solely for the reconsolidation. Management has raised the possibility of paying out some of SATS’ $421m net cash hoard, (enlarged by the proceeds from the sale of Daniels), by way of additional dividends. Nevertheless, our base dividend yield already stands at an attractive 5%. We maintain our Buy recommendation and target price of $2.70.

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%.

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.