• 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 ongoing 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.

Source: OCBC Research - 12 Feb 2014