• 1QFY16 results broadly in-line
• Expects stronger overseas growth
• Revise valuation method to DDM

1QFY16 results largely within expectations

SATS Ltd’s (SATS) 1QFY16 results were broadly in-line with our expectations as core PATMI grew 8.5% YoY to S$47.1m. Despite a 4.2% YoY decline in its 1QFY16 revenue to S$416.9m, core PATMI was higher mainly due to a 5.7% drop in operating expenses to S$372.9m and a 23.1% jump in contribution from overseas associates and Joint Ventures (JVs) to S$12.8m.

SATS’ strategy in driving productivity continues to bear fruit as 1QFY16 saw reduction across all expense categories except for depreciation and amortisation. The lower revenue was mainly due to an 8.2% drop in Food Solutions (FS) business but partially offset by a 2.0% increase in Gateway Services (GS) business.

Stronger indications of improved outlook

Going forward over the longer-term, we believe SATS will see steady growth on several reasons:

1) management’s commitment to drive productivity and invest in automation is likely to lead to sustainable reduction in staff costs and increase in operating leverage,

2) airport rebates of up to 20% to help alleviate some cost pressures but not as significant as staff costs,

3) growth in its cargo business that commands higher margins (e.g. cold chain facility),

4) overseas associates and JVs expected to grow in both FS and GS segments (e.g. recently increased equity stake in Philippines food catering partner),

5) re-acquired Jetstar Group as its client for GS segment (up to 40 flights/day) will see partial impact from 2QFY16 onwards,

6) SATS’ Japanese subsidiary, TFK, is expected to see higher contribution with the recent contract win to support Delta’s flight operations in Tokyo, and lastly,

7) management hinted on a strong pipeline of overseas investments through partnerships and JVs, which in our view, will drive SATS growth ahead.

Revision to valuation methodology; maintain HOLD

We raise our FY17F PATMI forecast by 7.6% on stronger growth outlook. We expect it to maintain a dividend pay-out ratio of ~80% going forward and revise our valuation methodology to DDM-based (prev: 16.5x FY16F P/E) to better reflect SATS’ value over the longer-term. Consequently, our FV increases from S$3.22 to S$3.78 (2% terminal growth; 7.2% WACC). Maintain HOLD, supported by FY16F dividend yield of 4.1%.

Source: OCBC Research - 24 Jul 2015