• FY15 slightly above expectations
• Moving towards more automation
• Decent dividend yield; maintain HOLD

FY15 beat our expectations

SATS Ltd (SATS) rounded off its FY15 with a decent set of 4QFY15 results. 4QFY15 core PATMI rose 18.6% YoY to S$51.6m even as revenue declined 2.2% to S$425.1m. Bottomline grew on the back of a 3.2% YoY reduction in operating expenses to S$380.4m, and a 32.3% jump in share of after-tax profits from overseas associates/JV to S$13.1m. FY15 core PATMI was slightly higher than our expectations as it formed 103% of our forecast, which was 7.0% higher vs. FY14 at S$195.9m.

FY15 revenue decreased 1.9% to S$1753.2m as Food Solutions (FS) business declined 4.7% driven by a 17.6% drop in revenue from its Japan subsidiary, TFK. These were mitigated by a 2.8% increase in Gateway Services (GS) business on favourable business mix with more cargo business. With a 2.5% decline in operating expenses, FY15 operating margin improved 0.6ppt to 10.2%.

Cost management and productivity gains still key focus

Once again, management reiterated strategy to focus on reining in costs and improving productivity through investment on automation for both the FS and GS segments. The key idea is to increase operating leverage such that workforce can be managed with higher business volume. For the FS segment, we believe revenue will continue be muted until air traffic volume picks up again, and TFK’s profit contribution to be subdued as management noted overcapacity of caterers in Narita Airport. We believe GS revenue will help mitigate the FS decline on expectation that business mix will continue to shift favourably towards cargo business, especially the higher-margin pharmaceutical segment. Over the longer-term, we believe SATS’ JV with BRF will provide growth but expect muted contribution in the near-term.

Increase FV; maintain HOLD

We think the recently announced fee rebates at Changi Airport and the expected growth in contributions from its associates/JV will help mitigate weaker performance from the FS segment. As such, we raise our FY16F PATMI by 1.2% and introduce FY17 forecasts. Rolling forward to 16.5x FY16F EPS, maintain HOLD as FV increases from S$2.98 to S$3.11, supported by a decent 4.7% FY16F dividend yield.

Source: OCBC Research - 15 May 2015