2Q in-line: TFK delivering, margins up. SATS reported 1HFY3/13 PATMI of SGD91.6m, coming in at 46% and 49% of ours and consensus’ full-year estimates respectively, with a seasonally stronger 3QFY3/13 still to come. 2QFY3/13 PATMI from continuing operations of SGD50.3m was a 20% improvement YoY, underpinned by stronger margins all round (Fig 2) and TFK continuing its recovery post-Mar 2011 Japanese disasters. We leave our forecasts largely intact, and roll forward our valuation basis to 17x FY3/14 PER, Target Price raised accordingly to SGD3.22. Maintain BUY.

Cost control the key. Concerns were raised during SATS’ 1QFY3/13 results regarding the ability to maintain margins in the face of rising cost pressures, and management’s sharpened focus on measures such as productivity improvements has delivered the desired results this 2Q. Although staff costs ex-TFK still rose 10.6% YoY to SGD156.7m, raw material costs actually dipped 2.3% YoY to SGD71.4m, the latter of which was likely helped along by easing of soft commodity prices.

Operating statistics suggests steady market share. SATS' operating performance was largely in line with those shown in Changi Airport Group’s own aviation traffic statistics. This suggests maintenance of market share for SATS in Singapore, which is good news in the passenger segment, but also leaves an exposure to a weak airfreight environment.

2Q that keeps naysayers at bay; Maintain BUY. SATS' encouraging 2Q results, buoyed by improved margins, should lay to rest some concerns of an inability to maintain margins in the face of escalating costs. We continue to like SATS for its exposure to Singapore’s robust tourism industry, its strong balance sheet and cash-generating business, which should continue to support attractive dividend yields of 6-7%p.a. For 1HFY3/13, an interim dividend of SG5cts/sh was declared as expected. We roll-forward our valuations to 17x FY3/14 PER, raise our Target Price to SGD3.22 and maintain our BUY recommendation.

Source: Maybank Kim Eng Research - 07 Nov 2012