Sats Q1 profit rises 9.7% to $44.3m

Revenue up 8.6% at $382.1 million as all businesses, divisions perform well

SINGAPORE Airport Terminal Services lifted its first quarter net profit by 9.7 per cent to $44.3 million as all businesses and divisions delivered growth.

The rise in earnings attributable to equity-holders came as topline revenue climbed 8.6 per cent to $382.1 million, from $351.7 million, during the April-June 2010 quarter, thanks to higher aviation revenue, improved UK food sales and higher sales from Singapore non-aviation food.

Share of profits from associated companies – primarily from joint ventures in Hong Kong and Indonesia – jumped 62 per cent to a record $14.7 million.

This helped particularly when group operating profit was weighed down 6 per cent to $41.2 million as raw material costs and staff costs rose (the latter partly due to the run-out of the Jobs Credit Scheme, which amounted to $6.1 million last year).

The rise in costs did result in a slight margin squeeze, with operating margin down to 10.8 per cent, versus 12.4 per cent a year earlier. But net margin remained stable at 11.6 per cent.

The company was sitting on a strong balance sheet, with cash balance of some $224.1 million as at June 30.

The results translated into earnings per share of 4 cents, compared with 3.7 cents a year earlier. Net asset value per share was $1.39 at end-June, versus about $1.36 three months earlier.

In terms of business spread, food solutions accounted for 43.5 per cent of revenue, while gateway services accounted for 34.5 per cent, and UK food business 21.3 per cent.

Aviation still accounted for close to 60 per cent of revenue by segment, while food accounted for 40 per cent.

The company handled 8.65 million passengers (up 13.8 per cent year-on-year) and 368,000 tonnes of cargo (up 12.8 per cent) during the quarter.

Singapore has the lion’s share going by geographical contribution, at 76.3 per cent, while the UK business, led by Daniels, was 21.3 per cent.

Chief executive Clement Woon attributed the good showing to proper implementation of its multi-pronged growth strategy and the recovery in the aviation operating environment.

‘The group’s aviation business is expected to improve further with the continued economic recovery in Asia,’ said Mr Woon.

‘Increased passenger traffic is anticipated in the coming quarters as full-service carriers continue to fill up seats, improve their yields and add more flights.

‘Cargo volumes are expected to align with the projected slower economic growth during the second half of 2010.’

The Singapore and UK food markets are expected to remain stable this year despite rising costs.

‘Come next month, Sats’ Food Solutions division will be participating in the Singapore Youth Olympics that will allow the group to showcase its competencies,’ he added.

Sats noted that the outlook for the Singapore tourism and hospitality sectors ‘remain vibrant’ with the 2010 F1 Singapore Grand Prix taking place in September and the progressive completion of the integrated resorts.

Record Tourism arrivals

Singapore Tourism Board (STB) announced a record high for visitor arrivals of 946,150 for the month of May. This double digit surge in visitor arrivals of 30.3% over the same period a year ago bodes well for the aviation sector. Moreover, there is a growing trend of preference for air transportation, by visitors traveling into Singapore, over the past one yr. We also observed a high percentage of visitor arrivals by air, of above 75%, for 4 out of 5 months of this year.

The previous peak monthly visitor arrivals of 971,452 experienced in December 2009 was achieved prior to the opening of Marina Bay Sands (MBS) and Resorts World Sentosa (RWS). With the opening of RWS and MBS in Feb and April 10 respectively, Singapore has entered into a new phase of growth as a tourism hub.

Traditionally, July and December were the strongest months for visitor arrivals. We believe that the previous peak levels would likely be breached in the corresponding months of 2010, along with the phased opening of the two integrated resorts.

Valuation:

We revised our revenue projections for SATS to include all these factors. Along with the proposed final dividend payout of 8cents in Aug 10 and our interim dividend expectations of another 6cents in Nov 10, total returns expected based on our 12monthly target price would be 29.3%. We believe that this margin of safety is sufficient for us to issue a BUY call on SATS. Furthermore, high yielding stocks, such as SATS, are particularly attractive under the low interest rate environment of today.

Rich valuations

• Maintain UNDERPERFORM and target price of S$2.19. 4Q10 net profit rose 10% yoy to S$46.5m, in line with our expectation of S$43.2m and consensus estimate of S$45.2m. FY10 net profit of S$181.2m forms 102% of our estimate and 101% of consensus. The decline in Jobs Credit benefits in 4Q10 to S$1.5m from S$12.3m in 4Q09 was offset by a sharp jump in associate profits to S$13m from S$4m a year ago and S$4.5m in prior years’ tax overprovision. The company declared a final dividend of 8 Scts, which brings its full-year dividend to 13 Scts. This translates to a 78% dividend payout ratio and a 4.7% dividend yield. Our FY11-12 EPS estimates are raised by 1-2% as we lift assumptions for revenue and associate profits. We maintain our UNDERPERFORM call due to its rich valuations and limited catalysts. Our target price remains at S$2.19, still based on 12.4x CY11 P/E.

• Rise in revenue. 4Q10 revenue rose 20% yoy to S$391m mainly due to the consolidation of SFI, which contributed S$165m vs. S$110m (two months contribution) in 4Q09. Aviation revenue also recovered on the back of a rebound in aviation statistics across the board as passengers handled grew 21% yoy, flights handled rose 11% yoy and cargo/mail processed jumped 16% yoy. Operating profit slipped 12% yoy to S$40.3m due to lower Jobs Credit benefits while operating margin narrowed to 10.3% from 14% in 4Q09. The 225% jump in associate profits to S$13m was attributed to stronger performance from the HK and Indonesia ground handling operations. Net margin contracted to 12% from 12.9% a year ago.

• FY11-12 EPS estimates raised. We raise our FY11-12 EPS estimates by 1-2% as we lift our assumptions for revenue and associate profits. We also introduce our FY13 estimates.

• Target price maintained. Our target price remains at S$2.19, still based on 12.4x CY11 P/E, its historical mean since Mar 03. While SATS has received a technical ramp license, which allows the company to provide complete ground handling services, the impact is limited in the near-term as most airlines have existing contracts with CIAS and SIAEC. The pending re-entry of a 3rd ground handler at Changi Airport is likely to cap long-term margins. We maintain our UNDERPERFORM call.

Tough year, but nice ending

At a Glance

• FY10 results largely within consensus’ and our expectations

• Aviation volumes recovering, expected to continue

• Final DPS of 8 Scents (FY09: 6 Scents) as expected

• Maintain Buy, TP: S$3.13

Comment on Results

FY10 net profit within expectations. FY10 net profit grew by 23% to S$181.2m on the back of S$1.54bn topline (+44.9% yoy). The revenue growth was due to full year consolidation of Singapore Food Industries (SFI) (S$634.4m). EBIT margins fell to 12%, from 16.1%, largely due to lower margin business of SFI. SFI contributed S$54.2m PAT, and generated free cash flow of S$62m. Based on SATS’ acquisition cost of S$487m, the ROI works out to c.11% (before amortization of intangibles). Net profit was also lifted by 89% increase in associates’ contribution to S$41.9m, mainly from its Indonesia and Hong Kong ground-handling associates.

Aviation volumes recovering well. Recovery in aviation volumes remains on track with all operating statistics (pax/flights/cargo handled, meals produced) showing positive growths. Most notable was unit meals produced, which grew 6% yoy in 4Q10, first positive number since 3Q09. While Apr’10 is likely to be marginally impacted by disruptions in flights due to volcanic ash in Europe and political unrest in Thailand affecting travel, management remains optimistic that recovery will continue.

Final DPS of 8 Scents; strong balance sheet. Net cash increased to S$173m, up from S$26m in FY09, largely due to strong free operating cashflow of S$190m in FY10. Coupled with its existing S$500m MTN, the group is financially ready for investments. Final proposed DPS of 8 Scents is expected (FY09: 6 Scents), bringing full year DPS to 13 Scents or equating to 78% payout.

Recommendation

Maintain Buy, TP: S$3.13. We maintain Buy call as the group continues to leverage on aviation recovery and grow its food solutions business. Our PE and DCF derived TP is revised down slightly to S$3.13 due to adjustment for a larger share base from share options conversion and slight adjustment on our FY11/12F EPS.

On board flight to recovery

Results in line with expectations. SATS Limited reported a good set of 4QFY10 results yesterday. Revenue was up 19.6% YoY (-10.1% QoQ) to S$390.6m due to S$165.1m contribution from Singapore Food Industries (SFI) and higher aviation revenue of S$218.7m, while PATMI was up 10.2% YoY (-12.9% QoQ) to S$46.5m, driven by higher contribution from overseas associates which more than offset the lower jobs credit benefit of S$1.5m for the quarter. Both revenue and earnings were spot on with our expectations. For FY10, revenue raked up a growth of 44.9% to S$1,538.9m, whereas PATMI registered a 23.5% rise to S$181.2m. The group ended the fiscal year by proposing a final dividend of 8 SG cents. Including interim dividend of 5 SG cents, total FY10 dividend translates to a payout ratio of 78% (up from 73% in FY09) and a yield of 4.7%.

Operating data for aviation business. 4QFY10 saw higher aviation business volumes across all operations, reflecting the recovery of the aviation industry and the Singapore economy. However, growth from meals produced and cargo throughput in the quarter was still not enough to bring the volumes back to pre-crisis level on an annual basis, resulting in declines of 6.8% and 3.7%, respectively. On brighter note, passengers and flight handled rose 6.7% and 8.2% respectively due to more traffic from low-cost carriers and the addition of Tiger Airways to its customer base.

Performance at SFI. According to management, revenue at SFI declined 7.1% in FY10 (as opposed to estimated 5.0% decline in SATS ex-SFI contribution), due to lower food distribution revenue from its Singapore operations, discontinuation of operations at Cresset in UK and the weaker pound. However, due to cost management and synergies from integration, pre-tax profit and earnings improved by 72.4% and 92.9%, respectively. We understand that the integration process post-SFI acquisition is now substantially completed, with S$12.2m savings expected per annum (S$7.0m savings achieved thus far).

Maintain BUY. Going forward, SATS expects to see improvements in activity level in FY11 as airlines gradually reinstate their capacities on the back of increased flights and cargo throughput. In Singapore, it is expecting to benefit from the opening of the two integrated resorts and iconic events such as the Youth Olympic Games and F1 Singapore Grand Prix. As the results and outlook are in line with our view, we are holding our FY11F revenue intact for now. Our DCF-based fair value also remains at S$3.27, implying a 17.6% upside potential. Maintain BUY.