Quarterly Results: 3QFY3/14

• 1.1% y-y decline in Revenue to S$465.5mn; 10.3% y-y decline in EBIT.
• Associates and JVs up 7.4% y-y to S$13.0mn
• Staff  cost  pressures  still  persists,  unless  productivity  gains  kick  in,  expect ebitda margins to stabilize at around 14% going forward
• FY3/15 should see 13%  EPS growth mainly driven by the S’pore  Cruise  Centre (SCC) all-cash acquisition
• Forward P/E of 16.1x is attractive  for 2 market  dominant  business positions (Gateway & Food at Changi Airport as well as SCC)
• Strong cash-generating business with attractive dividend yield of 4.9%
• Maintain "Accumulate" rating; with unchanged TP of S$3.47

How do we view the results?

• Revenue decline to S$465.5m was mainly due to Food solutions  (i.e. Qantas), partially mitigated by an increase in Gateway Services.
• On-year decline in meals produced  should persist for only one more quarter going into 4QFY13/14; after four quarters of the effect of the loss of Qantas has run its course.
• All  Operating  Statistics  for  Changi  Aviation  Business  were  up  y-y,  except  for Meals Produced
• Higher  staff  costs  –  Should  not  be  spiralling  out  of  control  as  productivity enhancing initiatives start to bear fruit.
• Good performance of Associates and JVs  –  This performance was in line with expectations  and  we  had  modelled  this  into  our  previous  forecast.  We continue to be optimistic on SATS’s Associates and JVs in the region.

Investment Actions

We had to adjust down our forward earnings estimates due to the cost pressures, but the following positives should be taken away: 1) acquisition of SCC is going to help  drive  13%y-y  EPS  growth  for  FY3/15,  2)  Associates  &  JVs  earnings  are showing  encouraging  growth,  3)  cost  pressures  do  not  last  forever,  and  one should  remember  that  market  dominant  positions  means  the  cost  effect  can  be mitigated  by  some  control  over  selling  prices,  4)  passenger  numbers  at  Changi Airport  are  expected  to  double  by  CY2020,  5)  Cruise  is  an  unrealised  growth potential,  6)  current  valuations  at  16.1x  FY3/15  EPS  is  not  unattractive.  We maintain our "Accumulate" rating on SATS with unchanged TP of $3.47.

Source: Phillip Securities Research - 13 Feb 2014