• Results above expectations
• Cost management still a key focus
• Increase FV; maintain HOLD

3QFY15 PATMI jumped 25.2% YoY to S$53.7m

SATS reported a good set of 3QFY15 results on the back of disciplined cost management and favourable business mix which pushed up overall operating margins. While revenue declined 3.2% YoY to S$450.7m, PATMI saw a 25.2% jump to S$53.7m. The lower revenue is largely attributable to the weaker result from its Japan subsidiary, TFK, resulting in a 7.2% YoY drop in its 3QFY15 Food Solutions (FS) segment revenue. Gateway Services (GS) 3QFY15 revenue, however, saw a 3.5% increase as SATS continue to gain market share in cargo handling business in Singapore. The shift in business mix away from FS segment resulted in a 13.1% drop in 3QFY15 raw materials expenses. Lower staff costs also helped improve profitability. SATS 9MFY15 PATMI came in above expectations with a 4.6% YoY increase, as it formed 79.6% and 78.4% of the street and our FY15 forecasts.

Cost management a key focus amid challenging outlook

Management reiterated strategy is still to focus on managing costs and improving productivity, which include a dynamic roster system, and investing in technology to increase operating leverage through automation, which requires fewer employees and hence lower staff expenses. Also, with the FS segment revenue declining on higher LCCs’ flight cancellations, the expected shift in business mix towards more cargo handling of higher margins (which makes up ~33% of GS segment revenue) is likely to continue, especially for pharmaceutical cargos. In addition, while share of profits from overseas GS associated/JV companies is likely to continue to face volume and price pressures, we expect lower energy costs and FS segment account rationalisation to improve profitability. We also expect TFK’s revenue to still be muted due to overcapacity of caterers in Narita Airport.

Decent dividend expected; maintain HOLD

We continue to think SATS will maintain a decent level of dividend pay-out (~90%). Incorporating 3QFY15 results and the above factors, our FY15/16F forecasts increase by 5.1% and 5.7%, respectively. Based on 16.5x FY16F PER (5-year mean), our FV increases to S$2.98 (previous: S$2.92). Maintain HOLD.

Source: OCBC Research - 5 Feb 2015