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.

SATS Q2 profit slips 11.3%

Profit at $40m on $424m revenue; group continues to fight food inflation

AIRPORT services giant SATS Ltd posted a $40.1 million net profit attributable to shareholders for the second quarter ended Sept 30, down 11.3 per cent from $45.2 million a year earlier as it continued to battle inflation, while contributions from associates and joint ventures slipped.

But underlying profit was flat at $44.6 million, compared to $45.2 million as its Japan-based TFK venture started contributing.

Topline revenue for the July-September quarter rose 32.3 per cent to $424.2 million, compared to $320.6 million.

Earnings per share (EPS) for the quarter was 3.6 cents, compared to 4.1 cents last year.

For the first half, the company posted profit attributable to shareholders of $82.6 million, down 7.7 per cent from $89.5 million. Revenue for the April-September 2011 period rose 30.3 per cent to $809.8 million.

EPS for the first half was 7.5 cents, versus 8.2 cents a year earlier.

The company, sitting on cash of some $163.4 million (prior to the sale of UK-based Daniels Group), announced an interim dividend of 5 cents per share.

SATS, which accounts for 80 per cent of the market at Changi Airport, saw expenditures rise 36 per cent, largely as food inflation and staff costs soared during the first half.

Still, its operating margin (net of Daniels) was steady at 10.7 per cent, while underlying net margin was 10.5 per cent.

SATS recently announced that it was divesting UK-based, non-aviation food unit, the Daniels Group, to Hain Frozen Foods UK for £pounds;159 million (S$321.8 million).

The Daniels Group – which manufactures and sells chilled drinks, ready-to-eat meals as well as fresh fruit and pudding – was acquired by SATS in 2009 as part of the latter’s takeover of Singapore Food Industries (SFI).

Asked if the company could make a special payout to shareholders from the Daniels sale proceeds, chief executive Tan Chuan Lye said that SATS was continuously seeking acquisition opportunities with the cash it had. ‘Whether or not we pay shareholders will be a matter to be discussed later,’ he said.

Over the last year or so, SATS has made numerous investments such as taking up a 40 per cent stake in Saudi-based Adel Abuljadayel Flight Catering Company as well as a 50.7 per cent stake in Japan-based TFK Corporation.

The company saw associates and JV contribution fall 16 per cent during the quarter, largely due to the declining fortunes of the cargo segment in South-east Asia.

Some 84 per cent of its revenue came from aviation side, while food solutions accounted for 56 per cent of sales. Some 65 per cent of revenue was from Singapore operations. Japan’s contribution was 14 per cent, from virtually nil last year, as TFK started firing up.

The company has also recovered 80 per cent of the cost of acquiring SFI via post-acquisition profits over the last 32 months.

Mr Tan noted that Changi’s newest and third ground handler, US-based Aircraft Service International Group, had yet to secure any new business during the period under review.

Meanwhile SATS acquired the inflight catering contract for Lao Airlines, and in Hong Kong and Japan, it got the ramp handling for Hong Kong Airlines and Hong Kong Express. It also renewed contracts with Japan Airlines, JetstarAsia, Tiger Airways and TNT Airways, and retained other clients.

SATS serves seven of the nine budget carriers operating out of Changi.

The company is awaiting the tender results for the contract to operate the Singapore International Cruise Terminal, which it expects shortly. The multi-million-dollar facility will officially start operating in April next year.

The latest results boosted SATS’ net tangible assets per share to around $1.01-$1.04 (based on the Daniels sales), up from 81 cents before.

Mr Tan said that despite the prevailing uncertainties in the operating environment, SATS would continue to grow and strengthen its core business and enhance shareholder value.

Divestment of Daniels Group

• Divestment of Daniels Group for c.S$321mn

• Exiting a difficult market with limited synergies to the Group

• Margin improvement on deconsolidation of Daniels

• Kept forecasts unchanged pending the announcement of its 2QFY12 results

• Maintain Buy with unchanged target price of S$2.73

What is the deal?

SATS announced the divestment of its UK Non-Aviation Food business (Daniels Group) to The Hain Celestial Group, Inc, for a consideration of approximately S$321mn (£159mn) representing EBITDA multiples of 9.8X and P/E multiples of 19.6X. The finalized amount of the sale could vary, depending on a set of EBITDA targets achieved by Daniels Group over the next 2yrs. As of end of 1QFY12, Daniels Group has a NAV of S$297.9mn and NTA of S$75.2mn. As mentioned in our latest update on 17Oct11, we view the divestment of Daniels Group as a positive move due to its limited synergies with the rest of the SATS Group. Furthermore, with the weak economic outlook for UK and the weakening of the GBP, Daniels Group could be facing inflationary pressure and low profitability in the near term.

Cash balance swells upon completion

Upon completion of the deal, we estimate SATS would have a sizeable amount of cash balance available for use (1QFY12 cash: S$306mn, less: Dividends paid on 17Aug: S$133mn, add: S$321mn: equals S$494mn). Unless the company takes on a significant acquisition, we believe that SATS would likely dish out some special dividends, as holding such a big cash balance would hurt the efficiency of its balance sheet.

Strategy for growth remains unchanged

During the conference call to discuss the divestment, SATS’s management maintained that they are still interested in acquisitions in businesses within their core competency. Key geographical areas cited include Asia Pacific & Middle Eastern region, where SATS have a significant presence.

Proforma Adjustments to our forecasts

In the discussion that follows, we make adjustments to our original forecasts, prior to the divestment, and illustrate this divestment’s impact on the income statements of Daniels Group. Key assumptions in our adjustments include (1) EBITDA margin of 6-8% for Daniels Group, (2) Loss on disposal of S$4.7mn booked in FY12E (assuming fair value of sale at £159mn) and (3) Deconsolidation of accounts from end Oct 11. As shown below, deconsolidation of Daniels Group would result in a 9-19% reduction in our revenue forecasts and 5-9% reduction in our EBITDA forecasts over the next 5years. However, as Daniels Group has lower margins than the rest of SATS Group, divestment would actually result in margin uplift for the Group. Overall, the PATMI and EPS impact is expected to be a reduction of 3-6%.

Special dividends in the works

• SATS sells Daniels Group for £151m

• Special dividends now a potential stock catalyst

• Expect better dividend payout but lower earnings estimates with loss of Daniels

• Upgrade to Hold TP raised to S$2.57

Daniels Group sold for £151m. SATS has sold UK food arm Daniels Group to The Hain Celestial Group Inc. for £151m, a unit it bought for approximately S$250m 2 years ago.

Potential of special dividends from Daniel’s sales proceeds. We understand from SATS that it does not require additional funding if it wins the rights to operate the new Singapore International Cruise Terminal at Marina South. Yet we believe that it is looking at various acquisition targets to expand its operations. Proceeds from Daniels work out to 27 cts per share. Assuming SATS pays half of the proceeds in special dividends (13cts per share) on top of its normal DPS of 13cts, total dividend yield could work out to 11%.

Cut earnings forecast by 2% (FY12) and 9% (FY13) on loss of contributions from Daniels. We expect disposal of Daniels to lower our revenue forecast for FY12F/FY13F by 9%/13% and profit forecast by 2%/9%. However, we expect earnings quality to improve going forward as Daniels generally yield lower margins than its core businesses.

Upgrade to Hold, TP raised to S$2.57, special dividends is a potential stock catalyst. Although loss of Daniels will impact earnings negatively, we expect other core operations to grow. With the sale of Daniels, we upgrade our core TP for SATS from S$2.20 to S$2.57 (Blended based on PE/DCF) and raise our call to HOLD.