SATS – Kim Eng
Decent 1Q despite Cost Pressures
1QFY3/13 showed robust revenue growth, TFK recovery. SATS reported a decent set of 1QFY3/13 results, posting a 3.8% YoY improvement in underlying NPAT from continuing operations to SGD41.3m. This was contributed by a healthy 13.6% increase in revenue to SGD437.9m. Revenue growth was led by both Gateway Services (+SGD11.6m, +8.1%) and Food Solutions (+SGD40.7m, +16.9%) segments. TFK saw a +40.7% YoY recovery in revenue from the Japanese March 11 disasters to SGD83.7m. Profits were also boosted by a greater contribution from its Associates/JVs (+SGD0.3m, +2.6%).
Keeping a lid on Cost pressures. Rising labour costs (Fig 2) have been cited as a concern by SATS, as their 13.4% YoY increase in staff costs contributed to their total group expenditure rising 12.6% YoY to SGD398.6m. However, management maintains a sharpened focus on productivity improvements to keep such cost pressures manageable. Their cost of raw materials have also increased significantly (+20.6%), but these were largely in line with revenue increases from their food solutions business (+16.9%).
The best has yet to come. SATS stated that TFK was still not operating at its pre-March crisis capacity, and we believe further progress in TFK’s recovery could provide further earnings upside for the Group. In addition, we should see further growth on the domestic front underpinned by robust passenger and aircraft arrivals at Changi Airport.
Maintain BUY, Ex-Div on 31 Jul. We maintain our optimism on SATS for its exposure to robust growth from domestic visitor arrivals and further TFK recovery. Its earnings resilience, strong cash-generating business and healthy balance sheet continue to support attractive forward dividend yields of 6-7%. Management does not rule out paying another special dividend with their excess cash even after the most recent bumper dividend of SGD0.21* per share going Ex-Div on 31 Jul. Maintain BUY, with Target Price pegged to 17x FY3/13 PER, 1 SD above its historical mean.
SATS – Phillip
Fair Valuations
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.
• 3.8% growth in underlying net profit
• Higher than expected revenue growth
• Staff cost surprised on the upside
• Margin pressures at the core business
• Downgrade to Neutral with TP of S$2.65
What is the news?
SATS announced a 3.8%y-y increase in underlying net profits on revenue growth of 13.6%. TFK’s revenue surged by 40% as the inflight catering arm benefitted from the low base effects off the Japan Earthquake in 1QFY12. The company’s balance sheet remains healthy with low gearing and strong cash balance of S$532mn.
How do we view this?
While SATS’s revenue performed better than expected, cost pressures from rising staff cost led to margin compression at the core business. The Group’s high labour expense of S$194mn led to the weakest profit margins at the core business in 2 years. As staff expenses are usually sticky in nature, we doubt profitability could improve meaningfully in the near term.
Investment Actions?
We downgrade our recommendation to Neutral. As we expect the company’s earnings recovery to be a year away, the stock’s potential upside could be limited. Following a surge in its stock price in anticipation of the special dividend payout, current valuation seems fair. SATS would go XD on 31st July with its dividend payout of 21cents per share.
SIAEC – DBSV
No let up in steam
• 1Q13 net profits of S$70m in line with estimates
• Aviation industry still growing decently with lower oil prices offering more relief; SIE’s growth unimpeded
• Dividend yield in excess of 5% largely secured
• Maintain BUY with higher TP of S$4.40
Highlights
Good start to the year. 1Q-FY13 results were in line with our expectations, with SIE reporting S$70.1m in net profits, up 3% yo-y and 6% q-o-q, on the back of 8% y-o-y growth in revenues. Revenue growth continues to be driven mainly by the increasing fleet size under SIE’s Fleet Management Programme (FMP). Given the relatively lower margins in the FMP segment (more material content), 1Q13 operating margins were 1ppt lower y-o-y at 11.4%, but this is still an improvement over the levels seen in the last two quarters, owing to lower sub-contract costs incurred during the quarter. Contribution from associates and JVs remained stable at S$40m, accounting for more than 50% of group PBT.
Our View
Stable outlook. With oil prices currently subsiding from the highs in early 2012, this will provide some relief to the airline industry in 2012. Load factors in the region continue to be stable and aircraft movements at Singapore’s Changi Airport continue to hit new records (10% growth during 1H-CY12), driven mainly by traffic from other Asian countries and the Middle East. Thus, with SIE’s key presence in the Asia-Pacific and the Gulf (Bahrain), we believe demand for the group’s core MRO businesses will remain stable in the near term. We expect SIE to record a steady 5 to 6% earnings growth in FY13/14. Note that SIE was recently been awarded a five-year fleet management contract worth S$166m by Cebu Air to maintain its growing fleet of A320 aircrafts.
Recommendation
Maintain BUY, likely yield of close to 5.5%. With its steady earnings outlook, strong balance sheet and healthy yield prospects, SIE remains a safe haven stock with limited possibility of earnings shocks. The group had ended the quarter with about S$574m in net cash, and we remain comfortable with our 22Scts dividend projection for FY13, which implies an 85% payout ratio. Hence, we maintain our BUY call on the stock. Our TP – based on the blended valuation methodology – is revised up to S$4.40 as we lower our WACC assumption from 7.8% to 7.4% in our DCF calculations to reflect growing confidence in the steady nature of SIE’s earnings and cash flow.
SIAEC – DBSV
No let up in steam
• 1Q13 net profits of S$70m in line with estimates
• Aviation industry still growing decently with lower oil prices offering more relief; SIE’s growth unimpeded
• Dividend yield in excess of 5% largely secured
• Maintain BUY with higher TP of S$4.40
Highlights
Good start to the year. 1Q-FY13 results were in line with our expectations, with SIE reporting S$70.1m in net profits, up 3% yo-y and 6% q-o-q, on the back of 8% y-o-y growth in revenues. Revenue growth continues to be driven mainly by the increasing fleet size under SIE’s Fleet Management Programme (FMP). Given the relatively lower margins in the FMP segment (more material content), 1Q13 operating margins were 1ppt lower y-o-y at 11.4%, but this is still an improvement over the levels seen in the last two quarters, owing to lower sub-contract costs incurred during the quarter. Contribution from associates and JVs remained stable at S$40m, accounting for more than 50% of group PBT.
Our View
Stable outlook. With oil prices currently subsiding from the highs in early 2012, this will provide some relief to the airline industry in 2012. Load factors in the region continue to be stable and aircraft movements at Singapore’s Changi Airport continue to hit new records (10% growth during 1H-CY12), driven mainly by traffic from other Asian countries and the Middle East. Thus, with SIE’s key presence in the Asia-Pacific and the Gulf (Bahrain), we believe demand for the group’s core MRO businesses will remain stable in the near term. We expect SIE to record a steady 5 to 6% earnings growth in FY13/14. Note that SIE was recently been awarded a five-year fleet management contract worth S$166m by Cebu Air to maintain its growing fleet of A320 aircrafts.
Recommendation
Maintain BUY, likely yield of close to 5.5%. With its steady earnings outlook, strong balance sheet and healthy yield prospects, SIE remains a safe haven stock with limited possibility of earnings shocks. The group had ended the quarter with about S$574m in net cash, and we remain comfortable with our 22Scts dividend projection for FY13, which implies an 85% payout ratio. Hence, we maintain our BUY call on the stock. Our TP – based on the blended valuation methodology – is revised up to S$4.40 as we lower our WACC assumption from 7.8% to 7.4% in our DCF calculations to reflect growing confidence in the steady nature of SIE’s earnings and cash flow.
SIAEC – Kim Eng
Holding Up Well with Stable Earnings
1QFY3/13 results in line. SIA Engineering (SIE) reported 1QFY3/13 NPATMI of SGD 70.1 m, making up 25% of our full year FY3/13 forecast. Although revenue improved 8.2% YoY to SGD 300.5 m, cost pressures contributed to a 0.9% drop in operating profit to SGD 34.4 m. JVs and Associates continued their significant contribution (~51% of PBT) to SIE’s bottomline, posting a 7.5% increase YoY.
Cost pressures and Margin concerns. In our previous note, we had highlighted our concerns of margin erosion and a delayed recovery in the aviation sector as key risks for SIE. These risk factors are still largely prevalent, with higher subcontract, staff and material costs being cited by SIE as main contributors to its 9.6% YoY increase in operating expenditure for 1QFY3/13.
Supported by positive MRO macro outlook. Amidst a possible delay in an aviation sector-wide recovery, the MRO segment remains relatively resilient, with a ~4% CAGR growth forecasted globally for the next 5 years. 1H2012 aircraft movement at Changi Airport has also maintained strong growth of 10.2% YoY, offering further growth support for SIE on a domestic front. SIE’s strong balance sheet with its net cash position of SGD 572 m and healthy cash-generating business (1QFY3/13 net cash inflow of +SGD 75.9 m) should continue to support a steady, growing dividend payout.
Within expectations, maintain HOLD. With SIE’s results in line with ours and consensus forecasts, we maintain our HOLD call, pegged to SIE’s historical PER average of 15.4x FY3/13 earnings. Existing investors keen on pure aviation engineering exposure can continue to enjoy SIE’s dividend yields in the 5-6% range. However, we reiterate our preference for ST Engineering in the aviation engineering sector, for its defense-backed contracts and strong orderbook which provides better earnings visibility.