Maintain BUY, TP: SGD4.05. Our fundamental view on the stock remains unchanged with results largely in line with expectations. With the highly cash generative nature of its business, we believe that SATS would structurally increase their dividends as they seek to optimise their capital structure. We have tweaked our TP to SGD4.05 to align our DCF assumptions for revised market risk premium of 5.5% (previous 6.0%). Reiterate BUY.

In-line with expectations. SATS reported a steady set of results with operating profit improving on better margins. Underlying net income improved significantly off a low base to SGD47.9m (-24% QoQ, +16% YoY). Management guidance appears cautious as they guide for moderation in passenger traffic growth and continued downward trend for airfreight.

Gains in Gateway revenue dampened by weak TFK contributions. Gateway revenue surged by 8% YoY due to a 9% YoY improvement in unit services handled. However, the better performance was dampened by weaker contributions from TFK Corp. (-16% QoQ, -22% YoY), which is largely due to a sharp 20% weakening of the JPY. While detailed disclosures on TFK were not provided, management commented that TFK reported weaker contributions, but remained profitable in the quarter.

Decline in meals produced in Singapore. The biggest source of variance from our expectations came from a 6.6% decline in unit meals produced at Changi Airport, which management attributed to lower workload from Qantas. However, the negative impact was softened by an improvement in average selling price of the meals.

Source: Maybank Kim Eng Research - 26 Jul 2013