SATS profit surges as revenue hits record

Full-year results get boost from SFI consolidation and offshore associates

FULL consolidation of Singapore Food Industries (SFI) and stronger contribution from offshore associates boosted the results of mainboard-listed Singapore Airport Terminal Services (SATS) during a year when its aviation business was under pressure.

The company, which ceased to be a Singapore Airline (SIA) subsidiary in September last year and is now 44 per cent owned by Temasek Holdings, yesterday unveiled record revenue of $1.54 billion for the year ended March 31, 2010.

This was a 45 per cent rise from the previous year’s $1.06 billion, and was due to some $634.4 million in contribution by SFI, which SATS acquired in February last year.

Net profit was up 24 per cent to $181.2 million, from $146.7 million, boosted by strong contribution from overseas businesses, especially ground-handling associates in Indonesia and Hong Kong.

During its January-March final quarter, the company boosted its net profit by 10 per cent to $46.5 million, on a 20 per cent rise in revenue to $390.6 million. The previous corresponding quarter’s numbers included two months of contribution from SFI.

The company had $196.4 million in cash, with free cashflow up 22 per cent to $190.1 million. Having prematurely paid down its outstanding $200 million MTN facility several months ago, it had virtually no debt.

SATS declared a final dividend of 8 cents per share, which when added to the 5 cents interim payout, totalled 13 cents for the year – 30 per cent more than the previous year and a record payout ratio of 78.1 per cent for normal dividend.

Besides the fact that food is becoming an increasingly huge portion of SATS’ business, what was striking about this set of results was the fact that its overseas associates – in which SATS had patiently placed a lot of faith for so many years – started paying off.

During the fourth quarter, contribution by overseas businesses – including associates – rose a whopping 225 per cent to $13 million. For the full year, their contribution grew by 89 per cent to $41.9 million.

The overseas business accounted for 27.3 per cent of revenue, almost four-fold from the previous year’s 7.5 per cent.

CEO Clement Woon pointed out that SATS’ Indonesian business did well as the country’s aviation industry remained largely unscathed by the industry slowdown last year. Meanwhile, the Hong Kong cargo handling business continued riding on the East Asian economic recovery.

With SFI now fully integrated and with its UK-based Daniels Group business a market leader, food now accounts for 67 per cent of SATS’ revenue, leaving aviation with just 32.2 per cent (the rest is corporate business). But in terms of segmental business, aviation is 56.7 per cent, down from 86.6 per cent a year earlier. Non-aviation business accounts for 43.1 per cent.

Mr Woon also expressed confidence that SATS’ joint venture in India with Air India will soon deliver on its promise by clinching airport contracts around the country.

‘We are now positioned to bring in the business,’ said Mr Woon, who has been instrumental in charting the transformation of the erstwhile SIA subsidiary.

Going forward, he expressed confidence that SATS was well positioned to ride the pickup in the global aviation market in particular, and the global economy in general.

Separately, SATS yesterday also announced that it has secured a 5-plus-5 year A$224 million contract from Singapore Armed Forces to provide logistics and support services in Australia.

SATS shares closed trading yesterday at $2.78.

Better results on the cards

• Air travel recovery faster than expected

• Project 20% yoy rise in 4Q earnings, ending FY10 at S$185.4m, above mean estimates

• Overall market growth more than offset potential entry of 3rd Ground Handler

• Reiterate Buy, TP raised to S$3.20

Project 20% growth yoy for 4Q10F. Most recent data from Changi Airport showed flights, passengers and cargo grew by 5.5%, 10.1% and 20% yoy respectively in Jan'10. We project SATS to show a 4Q10F net profit growth of 20% yoy, ending its full year at S$185.4m, above mean and our original estimates of S$178m. We are also expecting a final dividend of 8 Scents, bringing full year DPS to 13 Scents (76% payout). Going forward, we expect continued recovery in its aviation division, driven by a projected surge in CY2010 tourist arrivals (11.5m-12.5m: STB).

Market growth more than offset entry of 3rd player. The potential entry of a 3rd ground handler could happen soon, given that Changi Airport Group called for tender in Nov'09. In our view, the two likely candidates are Aero-Care and JetStar/AirAsia. We have factored in a 2ppt decline in its share of passengers handled from FY11F. However, SATS will benefit from market growth, which more than offset any potential erosion of market share, in our view.

Reiterate Buy, TP raised to S$3.20. We raised our FY10F forecast by 4% and FY11F/12F by c.2%, factoring in (i) higher pax/cargo handled; (ii) higher contribution from JVs; (iii) lower interest expenses, but offset partially by lower market share assumed. We adjust up our TP to S$3.20, from S$3.09. The counter is trading at 15.2x FY10F PE, but in view of its strong CAGR of 17%, this is projected to decline to 12.1x in FY12F. Valuations are still reasonable at prospective PE of 13.6x, P/B of 1.8x and a yield of c.5.4% (on FY11F earnings), which will support share price.

Ready to soar new heights

Stronger recovery in aviation demand… The International Air Transport Association (IATA) has halved its 2010 loss forecast for airlines to US$2.8b last week (from Dec 2009 forecast of US$5.6b), as improvements driven by economic recovery in Asia-Pacific and Latin America proved to be stronger than expected. According to the association, passenger and cargo demand, which fell by 2.9% and 11.1% respectively in 2009, are now expected to grow by 5.6% and 12.0% in 2010, significantly better than its previous forecasts of 4.5% and 7.0%. We expect SATS Limited to directly benefit from this stronger recovery in aviation demand due to its strong presence in the Asia-Pacific region.

…and growth in visitor arrivals likely to boost SATS' airport services. We also note Singapore Tourism Board (STB)'s recent optimistic projection for 2010 visitor arrivals, which is expected to hit between 11.5-12.5m, up by as much as 30% from 2009 number of 9.7m. We believe it further supports our view that SATS is likely to enjoy stronger demand for its airport services this year.

Food solutions segment expected to fare better as well. For its non-aviation business segment, we believe SATS would also register improved performance in the upcoming quarters, underpinned by strength at Singapore Food Industries (SFI), Country Foods and potential business opportunities in the tourism and hospitality sectors. In the upcoming 4QFY10, margins from SFI are also expected to maintain at current levels as it benefits from lower cost by consolidating commodities at larger quantities, and as Daniels Group enters into a seasonally stronger quarter.

Timely establishment of medium term notes. With the timely establishment of a new S$500m multi-currency MTN programme on 9 Mar, SATS is also well-positioned for all growth opportunities in our view. This as the net proceeds arising from the issue of Notes will be used for general working capital, capex, refinancing purposes as well as long-term strategic investments/acquisitions.

Maintain BUY with S$3.27 fair value. SATS is currently trading at 16.2x FY10F EPS and 14.2x FY11F EPS. We expect the stock to re-rate towards our DCF-based fair value of S$3.27 (or near its high cycle PER of 21x) amid a significantly stronger earnings profile (with acquisition of SFI) and brighter outlook. We believe SATS has still ample room for growth and yield improvements, both internally via synergies with SFI and externally through greater sales volume. Maintain BUY.

SATS in NIIT tie-up to market cargo system

Deal takes the partnership between the two companies to a new level

SINGAPORE Airport Terminal Services Ltd (SATS) and Mumbai-listed technology solutions provider NIIT Technologies have inked a strategic partnership for a global roll-out of their proprietary Cargo Operations System Intelligent Solutions (Cosys IS).

The deal marks an upgrading of a partnership between the two companies which goes back to 2000 when NIIT developed and implemented SATS’s existing cargo ground-handling software solutions at Changi.

‘We first developed Cosys IS to manage our cargo customers’ handling requirements as well as our extensive hub operations in Singapore,’ said Yacoob Peperdi, senior vice-president for Cargo Services at SATS. ‘Subsequently, Cosys IS was deployed at our overseas operations as part of our value adding contribution. It has proven to be a valuable operating tool, and we are happy to develop a deeper partnership with NIIT Technologies and to promote Cosys IS within the airline and cargo industry.’

Arvind Thakur, CEO of NIIT, said the system would be implemented wherever SATS has operations. The Singapore airport ground service giant has 14 joint ventures in 30 locations.

‘The intellectual property belongs to SATS, while we will implement it,’ he said, adding that NIIT would market the system to users.

This raises the potential of fee-based revenue for SATS and NIIT.

Mr Thakur said the recovery of the global air cargo business would help drive the demand for the product. ‘We are seeing 5 per cent average growth, with Asia leading the way,’ he said. ‘And as this growth accelerates, there will be opportunities to engage more business and build up revenue.’

NIIT, which has IHQ status here, is one of India’s leading IT-driven technology solutions providers to the finance, travel & transportation, and retail & distribution sectors. In the Asia-Pacific region, it also counts the governments of India, Singapore and Australia as its key clients.

Last year, NIIT Technology and its parent, NIIT Ltd – a leading software training provider in India – together chalked up revenue of over US$400 million.

The company has had a relatively long presence in Singapore, with a staff of more than 100 who have worked on developing various e-government solutions for ministries and government agencies.

In Australia, it is the leading solutions provider to the transport department.

SATS sets up new MTN facility

$500m open-dated programme with no expiry period replaces earlier one

SINGAPORE Airport Terminal Services (SATS) has established a new $500 million multicurrency medium-term note (MTN) programme to help finance potential investments and expansion.

The latest note programme replaces its 10-year $500 million MTN programme set up in 2001. SATS drew down just $200 million from that programme in 2004, which was subsequently paid down and retired in September last year.

The latest MTN facility, arranged by DBS Bank and OCBC Bank, is open-dated or ‘evergreen’, with no expiry period.

SATS indicated it can be used for general working capital, capital expenditure and capital management purposes, as well as strategic investments and to refinance borrowings.

In a statement issued via the Singapore Exchange, SATS said the notes may be issued on a syndicated or non-syndicated basis.

‘Each series of notes may be issued in one or more tranches, on the same or different issue dates, and be issued at par or at a discount, or premium, to par,’ it said.

‘Notes may bear interest at fixed, floating, variable or hybrid rates or such other rates, and subject to compliance with all relevant laws, regulations and directives, may have maturities of such tenor, as may be agreed between SATS and the relevant dealer(s). Hybrid notes or zero coupon notes may also be issued under the programme.’

Having the facility does not necessarily mean cash-rich SATS will use it any time soon.

‘This facility simply replaces the previous one, and we secured it just to give us some financial flexibility,’ said Sandy Leng, the company’s head of investor relations.

SATS has virtually no gearing, and had cash of some $138 million in the kitty at end-December 2009. This was after it paid $487 million to buy Singapore Food Industries (SFI) last year.

SATS boosted net earnings for its third quarter to end-December 2009 by 42 per cent, or $15.8 million, to $53.4 million, thanks primarily to the consolidation of SFI, which it bought for some $509 million a year ago. Topline revenue for the quarter rose $191.9 million, or 79.2 per cent, to $434.3 million, with SFI contributing $199.6 million, or 46 per cent of this.

Net profit for the April-December 2009 period rose 29 per cent to $134.7 million, on a 56 per cent rise in revenue to $1.15 billion, surpassing the full-year FY’08/09 revenue of $1.07 billion.