SGX Yield Stock

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.

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.