Cruise control

SATS wrapped up FY13 on a pleasant note, not only reporting stronger-than-expected profits but also dishing out higher-than-expected dividends.

FY13 core net profit surpassed Street and our expectations by 8% on the back of margin strength. We fine-tune our FY14-15 EPS by less than 1% and raise our target price (still at 16.8x CY14 P/E, 1SD above its 8-year mean) marginally. Maintain Outperform with re-rating catalysts to come from growth in Changi Airport’s passenger traffic.

Leveraging Changi Airport’s growth

We expect strong intra-Asia travel to buoy SATS’s revenue. Stronger passenger volume had lifted its FY13 revenue by 8% yoy, with revenue growth across the board: gateway services (+8%) and food solutions (+8%). High staff costs were mitigated by slower rises in raw-material costs, supporting a 0.6%-pt expansion in EBIT margins to 10.6%. Excluding a S$16.8m impairment charge relating to its divestment of Daniels, core net profit grew 20%.

Gateway services hit by labour costs

Costlier labour took a toll on gateway services EBIT (-54%). Wage inflation was attributed to headcount increases and foreign-worker levies. Fortunately, growth from food solutions overwhelmed the weakness. EBIT margins from food solutions gained 2.8% pts, thanks to slower rises in raw-material costs and productivity gains.

Dividend sweetener

A 6ct final dividend and 4ct special dividend was declared, taking FY13 DPS to 15cts, above our 11.8ct forecast. Dividend prospects remain favourable with SATS enjoying positive free cash flows and a net-cash position.

• Notwithstanding the one-off impairment charge for sale of Daniels Group which was completed in October 2011 for S$16.8 million and other small exceptional items, SAT’s 4Q ’13 underlying net profit from continuing operations rose 32.4% y-o-y, buoyed by increased flights and higher meal volumes.
  
• SATS also proposed a final dividend of 6 cents per share, and cut its special dividend to 4 cents per share from last year’s 15 cents per share. The full financial year 2013 dividend yield amounts to 4.7%.
  
• Management guided that demand for the Group’s gateway and food business could continue to be underpinned by strong growth of passenger traffic at Changi Airport and within the Asian region. But air freight demand could remain weak. Similar to other Singapore corporates with domestic operations, the company could see rising wage costs due to the Singapore government’s manpower policies going forward.

• Notwithstanding the one-off impairment charge for sale of Daniels Group which was completed in October 2011 for S$16.8 million and other small exceptional items, SAT’s 4Q ’13 underlying net profit from continuing operations rose 32.4% y-o-y, buoyed by increased flights and higher meal volumes.
  
• SATS also proposed a final dividend of 6 cents per share, and cut its special dividend to 4 cents per share from last year’s 15 cents per share. The full financial year 2013 dividend yield amounts to 4.7%.
  
• Management guided that demand for the Group’s gateway and food business could continue to be underpinned by strong growth of passenger traffic at Changi Airport and within the Asian region. But air freight demand could remain weak. Similar to other Singapore corporates with domestic operations, the company could see rising wage costs due to the Singapore government’s manpower policies going forward.

Healthy growth on seasonal strength

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.

• 7.6% growth in underlying net profit.
  
• Guidance positive for passenger travel business, while air freight business is expected to remain weak.
  
• We expect dividend yields to sustain above 5% over the next few years.
  
• Maintain Accumulate with TP of S$3.33.
  

What is the news?

Driven by strong performance of its aviation business units in Singapore, SATS reported a 23% surge in profit for 3QFY13. When normalized to exclude one-off items in the previous quarter, underlying profits improved by 7.6%. EBITDA margins were stable at 15.0% (vs 3QFY12: 15.5%). Contribution from TFK was mildly impacted by a decline in traffic flows due to a seasonally stronger 2QFY13 and depreciation of the JPY. Outlook statement is positive for the passenger travel business, while the air freight business is expected to remain weak.

How do we view this?

As guided in our commentaries for the results season, the surge in profits was expected due to a seasonally stronger quarter for the aviation business in Singapore. CAPEX for 9MFY13 of S$28.4mn is significantly lower than its normalized level of S$50-70mn a year, which could lead to cash build up by the end of FY13E.

Investment Actions?

We maintain our view that SATS have the capacity to dish out significantly higher levels of dividends to shareholders over the next few years. Assuming a 90% payout ratio, we forecast dividend yields of >5% over the next few years. Maintain Accumulate with revised TP of S$3.33, as we roll forward our valuation basis.

Healthy growth on seasonal strength

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.

• 7.6% growth in underlying net profit.
  
• Guidance positive for passenger travel business, while air freight business is expected to remain weak.
  
• We expect dividend yields to sustain above 5% over the next few years.
  
• Maintain Accumulate with TP of S$3.33.
  

What is the news?

Driven by strong performance of its aviation business units in Singapore, SATS reported a 23% surge in profit for 3QFY13. When normalized to exclude one-off items in the previous quarter, underlying profits improved by 7.6%. EBITDA margins were stable at 15.0% (vs 3QFY12: 15.5%). Contribution from TFK was mildly impacted by a decline in traffic flows due to a seasonally stronger 2QFY13 and depreciation of the JPY. Outlook statement is positive for the passenger travel business, while the air freight business is expected to remain weak.

How do we view this?

As guided in our commentaries for the results season, the surge in profits was expected due to a seasonally stronger quarter for the aviation business in Singapore. CAPEX for 9MFY13 of S$28.4mn is significantly lower than its normalized level of S$50-70mn a year, which could lead to cash build up by the end of FY13E.

Investment Actions?

We maintain our view that SATS have the capacity to dish out significantly higher levels of dividends to shareholders over the next few years. Assuming a 90% payout ratio, we forecast dividend yields of >5% over the next few years. Maintain Accumulate with revised TP of S$3.33, as we roll forward our valuation basis.