SGX Yield Stock

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.

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.