• 4QFY14 results below forecasts
• Expect weakness in aviation industry to spill over
• Maintain HOLD

4QFY14 results below expectations

SATS’s 4QFY14 results were below our expectations. Revenue declined 3.2% YoY to S$434.6m, or 7.9% below our forecast. Correspondingly, PATMI dropped 7.8% to S$42.6m, which is 5.8% below our estimate. PAT from overseas associates/JV for 4QFY14 was 46.5% lower at S$9.9m, mainly due to lower cargo volumes and higher staff costs. FY14 revenue dropped by 1.8% to S$1.8b. Food Solutions saw 5.2% revenue decline to S$1.1b, mainly due to: 1) weaker TFK performance from JPY translation losses, and 2) Quantas’ move to Dubai from Changi Airport. These were partially mitigated by a 4.5% revenue increase in Gateway Services to S$678.1m as more accounts were secured. FY14 PATMI came in 2.4% lower at S$180.4m. A final dividend of 8 S-cents was declared, bringing FY14 dividend to 13 Scents, or 81% payout ratio. Management guided that such payout levels would be sustained.

Shifting expenses away from labour

As labour is the biggest expense item (48% of total expenditure in 4QFY14) and will only increase with wage inflation and statutory levies, management intends to invest more in technology. However, we think this proposition will likely only see success in markets where labour is relatively expensive (e.g. Singapore, Hong Kong and Japan). Hence, the impact is likely to be limited in the near future.

Caught in weak aviation industry

Management thinks PT CAS acquisition will create synergies and provide access to highgrowth Indonesian market. They also plan to leverage on their existing relations with airlines and cruise operators to create connectivity for their clients, during which SATS will benefit too. However, we think the aviation industry headwinds will be the larger force in SATS’ near- to mid- term outlook. As overcapacity plagues passenger and cargo carriers, SATS’ end clients, we think the rates and volume for SATS will inevitably suffer as well, though not as cyclical as its end clients. Based on 20x FY15F EPS, we derive a lower FV of S$3.23 (previous: S$3.35) and maintain HOLD.

Source: OCBC Research - 23 May 2014