SGX Yield Stock

Grounded by weak Yen and high staff costs

• 3Q14 results below expectations; net profit dropped by 8.7% to S$42.9m
  
• Weaker contribution from Food Solutions arising from weaker JPY, higher staff costs
  
• Trim forecasts by 9%/2%
  
• Maintain HOLD, TP revised to S$3.25
  

3Q14 results underperform on weaker JPY, higher staff costs. 3Q14 net profit dropped by 8.7% y-o-y to S$42.9m, which was below our expectations. The Group’s revenue slipped by 1.1% to S$465.5m, largely on weaker contribution from its Food Solutions’ segment (-3.9%), mitigated partially by higher contribution from Gateway Services (+4.3%). Food Solutions’ revenue was impacted by JPY depreciation, as well as fewer unit meals served (-5.7%) in 3Q14.

EBIT margins weakened by 0.9ppt to 9%. Operating expenses dipped by a slower pace vis-à-vis topline, largely on the back of higher staff costs. The Group continued to be impacted by higher worker levies. As a result, EBIT margins dipped by 0.9ppt to 9% (3Q13: 9.9%).

Trim forecasts by 9%/2%. We cut our net profit forecasts by 9%/ 2% for FY14F/15F, on the back of a slower topline growth assumption due to a weaker JPY. Our FY15F downward revision is mitigated by the inclusion of contribution from its proposed Singapore Cruise Centre acquisition, which is currently being reviewed by the Competition Commission of Singapore. Management remains hopeful for an outcome by May 2014.

Maintain HOLD, TP at S$3.25. Our TP is adjusted down to S$3.25, due to lower earnings forecasts but mitigated partially, as we roll over our valuation base to FY15F. SATS trades at c.15.9x FY15F PE, which is +0.5 std deviation above its historical mean, and largely in line with regional peers. We believe downside to its share price should be muted, with its strong cash generation and relatively attractive dividend yield of c.5%. Maintain HOLD.

Staff Costs Drag 3Q14 Profit

SATS recorded lower food revenue y-o-y, largely due to the Qantas and JPY impact, which was somewhat offset by higher gateway revenue as passenger traffic at Changi Airport continued to grow. Proportionately higher operating expenses dragged down PATAMI growth. While SATS’ long-term outlook is encouraging, we expect near-term headwinds with regards to staff costs. Maintain NEUTRAL and a SGD3.43 TP.

Revenue growth impacted by forex. SATS’ 3Q14 PATAMI slid 8.7% to SGD42.9m, on the back of a 1.1% decline in revenue. The revenue decline was largely due to a dip in food revenue, after Qantas pulled out its longhaul flights from Changi Airport in 1H CY13. On a q-o-q basis, the impact of Qantas’ departure is stabilising, but food revenue is likely to remain under pressure from the depreciating JPY. Gateway revenue is likely to see moderate growth, backed by increasing passenger traffic at Changi Airport.

More efforts to lower operating costs. In order to mitigate the expected rise in manpower costs, SATS is actively looking to raise productivity, through automation and the use of technology. While no further details were given, management highlighted that it will put more efforts into improving productivity, such as building more passenger self-check-in booths at the terminals.

Positive on long-term prospects. SATS’ proposed acquisition of the Singapore Cruise Centre (SCC) is currently under the second review by the Competition Commission. Passenger traffic at the Marina Bay Cruise Centre Singapore (MBCCS) has been growing, although the volume is still small at the moment. Should it become the owner of both cruise centres, SATS would stand to benefit from the growing cruise industry in Singapore. The company, which is also the largest caterer in Singapore, is poised to benefit once the Sports Hub starts operations, likely in 2H CY14. In the near term, higher staff costs could slow profit growth.

Lowering PATAMI estimates. We lower our FY14 PATAMI estimate to SGD194m, from SGD217m. Consequently, we trim our DCF-based TP to SGD3.43 (from SGD3.49). Maintain NEUTRAL.

Sluggish 3Q results and 4Q outlook

• 9M earnings met 76% of FY estimate
  
• Challenging near-term outlook
  
• Hold and FV under review
  

Lethargic 3QFY14 results

SATS Ltd posted a pretty lethargic set of 3QFY14 results. Revenue was flat at S$465.5m, or just shy of the street’s S$472.5m forecast (based on Bloomberg consensus), mainly due to lower food revenue (down 3.9% YoY) arising from the weaker Yen. But earnings slipped 8.7% to S$42.9m, dragged down by the 10.3% fall in operating income, despite seeing 7.4% increase in share of results from Associates/JVs (due to better showing in China and Indonesia). Earnings also missed consensus forecast of S$52.2m by 18%. For 9MFY14, revenue fell 1.3% to S$1352.1m, meeting 76% of our FY14 forecast (72% of consensus), while reported net profit edged 0.6% lower to S$137.8m. Excluding one-off items, core earnings would have been S$139.5m (+0.4%), or about 73% of our full-year estimate (67% of consensus).

Near-term outlook remains challenging

Going forward, SATS notes that the operating landscape remains challenging, given the on-going pressure on airlines’ profitability and rising labour costs. And in the near term, management adds that it only expects modest growth in passenger traffic at Changi Airport and only marginal growth in air freight at best. Nevertheless, it will continue to focus on scaling up its food business and improving connectivity in its gateway business, where it is already the largest food solutions and gateway services company in Asia. SATS also intends to use automation and technology to counter rising manpower costs, which we had already flagged as a longer-term concern and continue to await further clarity on potential cost savings.

Hold rating and FV under review

Given the still-muted outlook, as well as the below-forecast earnings, there is likely to be a negative knee-jerk reaction in SATS’ share price, especially after the 3.2% rebound from the recent S$3.08 low. Due to a change in analyst coverage, we put our Hold rating and S$3.35 fair value under review.