Datapoints suggest another quarter of growth

Continued growth in demand. We expect SATS Ltd to deliver another positive set of results when it reports its 2QFY11 performance in Oct. The international air travel and freight markets continued to show strengthening of demand in Jul, despite uncertainties about global economic growth in 2H10. According to the International Air Transport Association (IATA), international revenue-passenger-kilometers (RPKs) and scheduled freight traffic in Jul were up by 9.2% and 22.7% YoY respectively. This follows a 11.6% YoY growth in travel market and 26.6% YoY growth in cargo traffic in Jun. More importantly, both the Asia-Pacific passenger and cargo demand continued to outperform the industry average with a 10.9% and 25.3% YoY growth in Jul. As such, we believe that SATS may potentially gain from this continued expansion in demand, given its significant exposure in the region.

Sound performance at customer side. In the announcement by its customer Singapore Airlines on Wed, we also note that the airline’s system-wide passenger carriage grew by 0.1% YoY in Aug. This marks another month of positive growth in the quarter. While the growth rate was lower than the 3.6% YoY growth clocked in Jul, this was partially due to earlier commencement of Ramadan. In Sep, we expect the passenger demand to register relatively stronger growth as Ramadan ends early in the month. For its cargo segment, we also understand that the overall traffic had continued to improve by 9.0% YoY, repeating the 8.2% YoY increase in Jul. These improvements are likely to lead to further demand for SATS’ services, and in turn better financial performance for its 2QFY11.

Integrated pig farm progressing as planned. Further to the JV agreement in May to develop an integrated pig farm in Jilin Province, China, we also note that SATS had begun construction of the 100,000sqm site. The building of the farmis expected to be completed in nine months, with an annual production of 100k pigs in the first phase. While it will not contribute to earnings in the current fiscal year, we are confident that it will provide SATS with another avenue of growth in the years ahead, considering the strong support from both the Singapore and Chinese governments.

Maintain BUY. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and generous dividend payouts. We are keeping our fair value of S$3.30 as the developments are consistent with our expectations. At current level, we see an attractive 19.1% upside potential in the stock. Maintain BUY.

Datapoints suggest another quarter of growth

Continued growth in demand. We expect SATS Ltd to deliver another positive set of results when it reports its 2QFY11 performance in Oct. The international air travel and freight markets continued to show strengthening of demand in Jul, despite uncertainties about global economic growth in 2H10. According to the International Air Transport Association (IATA), international revenue-passenger-kilometers (RPKs) and scheduled freight traffic in Jul were up by 9.2% and 22.7% YoY respectively. This follows a 11.6% YoY growth in travel market and 26.6% YoY growth in cargo traffic in Jun. More importantly, both the Asia-Pacific passenger and cargo demand continued to outperform the industry average with a 10.9% and 25.3% YoY growth in Jul. As such, we believe that SATS may potentially gain from this continued expansion in demand, given its significant exposure in the region.

Sound performance at customer side. In the announcement by its customer Singapore Airlines on Wed, we also note that the airline’s system-wide passenger carriage grew by 0.1% YoY in Aug. This marks another month of positive growth in the quarter. While the growth rate was lower than the 3.6% YoY growth clocked in Jul, this was partially due to earlier commencement of Ramadan. In Sep, we expect the passenger demand to register relatively stronger growth as Ramadan ends early in the month. For its cargo segment, we also understand that the overall traffic had continued to improve by 9.0% YoY, repeating the 8.2% YoY increase in Jul. These improvements are likely to lead to further demand for SATS’ services, and in turn better financial performance for its 2QFY11.

Integrated pig farm progressing as planned. Further to the JV agreement in May to develop an integrated pig farm in Jilin Province, China, we also note that SATS had begun construction of the 100,000sqm site. The building of the farmis expected to be completed in nine months, with an annual production of 100k pigs in the first phase. While it will not contribute to earnings in the current fiscal year, we are confident that it will provide SATS with another avenue of growth in the years ahead, considering the strong support from both the Singapore and Chinese governments.

Maintain BUY. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and generous dividend payouts. We are keeping our fair value of S$3.30 as the developments are consistent with our expectations. At current level, we see an attractive 19.1% upside potential in the stock. Maintain BUY.

Expect stronger quarter ahead

At a Glance

• 1Q11 within expectations; net profit +10% yoy

• Lower EBIT (-7%) due to cessation of Jobs Credits mitigated by stellar 62% growth in JVs contribution

• Stronger quarters ahead on further pick up in activities (YOG, F1, airlines yields/load factor, etc)

• Maintain Buy, TP unchanged at S$3.13; potential upside to forecasts and TP from better-than-expected tourist arrivals and airline load factors

Comment on Results

1Q11 results within expectations. 1Q11 net profit was up by 10% yoy to S$44.3m, on the back of topline growth of 9% to S$382m. EBIT declined by 7% due to cessation of Jobs Credit (1Q10: S$6.1m). Excluding Jobs Credit, EBIT would have grown by c.8%. This was, fortunately, mitigated by a strong 62% growth in Associates/JV contribution to S$14.7m, largely by its Indonesia and Hong Kong operations.

UK reported strong 19% topline growth. Revenues grew from all segments with Gateway Services growing by 9.7% as aviation recovery continues to kick in with higher volumes. Notwithstanding the economic woes in UK, revenue grew by a strong 19% to S$81.3m, contributed by higher sales from Daniels’ juice and the “cut-fruit” categories.

Steady build up of cash to S$224m. Despite a delayed receipt of S$27m in receivables (which has since been collected), and final capex payments for its Coolport and Grimsby plants (S$16m), cash increased by S$29.1m from 4Q10.

Recommendation

Quarters ahead to show stronger growth. With Youth Olympic Games (YOG), F1, together with the ramp up at the Integrated Resorts, and pick up in yields/load factors for airlines, we should see better quarters ahead for SATS. 3QFY is also the traditionally strong quarter for Daniel’s in UK. Maintain Buy, TP unchanged at S$3.13. Potential upside to earnings and TP could lie in better-than expected tourist arrivals and yields/load factors of full cost airline carries, benefiting SATS’ aviation operations.

Expect stronger quarter ahead

At a Glance

• 1Q11 within expectations; net profit +10% yoy

• Lower EBIT (-7%) due to cessation of Jobs Credits mitigated by stellar 62% growth in JVs contribution

• Stronger quarters ahead on further pick up in activities (YOG, F1, airlines yields/load factor, etc)

• Maintain Buy, TP unchanged at S$3.13; potential upside to forecasts and TP from better-than-expected tourist arrivals and airline load factors

Comment on Results

1Q11 results within expectations. 1Q11 net profit was up by 10% yoy to S$44.3m, on the back of topline growth of 9% to S$382m. EBIT declined by 7% due to cessation of Jobs Credit (1Q10: S$6.1m). Excluding Jobs Credit, EBIT would have grown by c.8%. This was, fortunately, mitigated by a strong 62% growth in Associates/JV contribution to S$14.7m, largely by its Indonesia and Hong Kong operations.

UK reported strong 19% topline growth. Revenues grew from all segments with Gateway Services growing by 9.7% as aviation recovery continues to kick in with higher volumes. Notwithstanding the economic woes in UK, revenue grew by a strong 19% to S$81.3m, contributed by higher sales from Daniels’ juice and the “cut-fruit” categories.

Steady build up of cash to S$224m. Despite a delayed receipt of S$27m in receivables (which has since been collected), and final capex payments for its Coolport and Grimsby plants (S$16m), cash increased by S$29.1m from 4Q10.

Recommendation

Quarters ahead to show stronger growth. With Youth Olympic Games (YOG), F1, together with the ramp up at the Integrated Resorts, and pick up in yields/load factors for airlines, we should see better quarters ahead for SATS. 3QFY is also the traditionally strong quarter for Daniel’s in UK. Maintain Buy, TP unchanged at S$3.13. Potential upside to earnings and TP could lie in better-than expected tourist arrivals and yields/load factors of full cost airline carries, benefiting SATS’ aviation operations.

Strong execution in 1QFY11

1QFY11 results driven by broad-based growth. SATS Limited reported its 1QFY11 results last evening. Revenue came in at S$382.1m (+8.6% YoY, -2.2% QoQ), forming 24.1% of our FY11 sales forecast (22.9% of consensus), while PATMI reached S$44.3m (+9.7% YoY, -4.7% QoQ), representing 22.8% of full-year earnings estimate (21.6% of consensus). We note that the group enjoyed broad-based growth over the quarter, with aviation revenue (+9.1% YoY) driven by higher cargo throughput and passenger traffic, and non-aviation food business (+8.4% YoY) boosted by higher drinks and fruit sales from its UK operations. Better performances were also recorded by its ground handling associates in Hong Kong and Indonesia, leading to a strong 61.5% growth in contribution from overseas associates. As such, bottomline grew at a relatively faster pace than its topline, notwithstanding the absence of S$6.1m jobs credit benefit seen in 1QFY10. Excluding this benefit, we estimate that PATMI would have grown by 29.2% YoY (vs. 9.7% YoY growth as reported).

Positive outlook. Going forward, management expects its aviation business segment to improve further, in tandem with the economic recovery in Asia. Notably, passenger traffic is anticipated to grow in the coming quarters as full-service carriers continue to improve their yields and add more flights. In addition, cargo volumes are expected to grow, albeit at slower rate, mirroring the moderating economic growth projected in 2HCY10. Despite rising costs, SATS also added that its Singapore and UK food business are expected to remain stable in 2010.

Update on Coolport. On its perishable cargo handling centre, Coolport@Changi, management updated that the facility has commenced operations since 17 Jun and that the group is now in discussion with prospective customers for business opportunities in this area. Management currently expects Coolport to breakeven in 2-3 years. However, if it manages to secure big customers (where revenue is expected to be lumpy), the facility may break even as early as end-FY11.

Maintain BUY. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and generous dividend payouts. We are revising our FY11 forecasts upwards by 2.1-2.7% as we incorporate the quarterly results into our full-year projections. This raises our DCF-based fair value to S$3.30 from S$3.27 previously. Despite the share price jumping by 16.5% since our last report on 10 Jun, we continue to see an attractive upside potential of 11.5% on SATS. As such, we maintain our BUY rating on the stock.