• 1HFY16 revenue of S$839.6 mn met 45.9% of our full year forecast, distortion due to transfer of Food Solutions revenue to SATS BRF Food Pte Ltd JV.
• 1HFY16 PATMI of S$109.3 mn met 50.1% of our full year forecast, but we now expect a stronger 2HFY16.
• 5.0 Cents interim dividend declared, expect higher full year dividend.

What is the news?

Lower Food Solutions revenue, as food distribution business from SFI was transferred to the SATS BRF Food Pte Ltd (SBRF) JV. As this food distribution business from SFI was Non-Aviation, a larger proportion of Group revenue will come from Aviation Industry going forward (84.9% in 2QFY16 vs. 80.2% in 2QFY15). Consequently, Group revenue could become more cyclical.

Recall that acquisition of SFI by SATS was to gain exposure to Non-Aviation food, which is less cyclical compared to Aviation Food segment. We understand that SBRF is breaking even at the moment, and we are optimistic of it contributing positively to Group PATMI.

Management highlighted some details and rationale for the Brahim's Airline Catering Holdings Sdn Bhd (BACH) acquisition. BACH has strong market share at Kuala Lumpur International Airport (KLIA) with MAS being the base customer. As the leading flight caterer at KLIA, Management expects further growth for BACH. BACH also has the potential to expand to Non-Aviation catering. In line with having a 49% stake in BACH, SATS will have "significant management representation" in BACH.

Growth momentum in flights handled by SATS at Changi. Previous four consecutive quarters saw negative growth in flights handled by SATS, exacerbated by the loss of the Jetstar Asia account in Oct-14 (3QFY15). The account was regained in Jul-15 (2QFY16), and we expect to see high single-digit %y-o-y growth in flights handled by SATS in the next three consecutive quarters of 3QFY16e, 4QFY16e and 1QFY17e. The growth is due to the combination of flight volume picking up at Changi Airport and reversal effect of regaining the Jetstar Asia account.

Investment Actions

We see better earnings for SATS driven by: (1) higher Aviation revenue coming out of Changi Airport, due to growth in flights and passengers handled, (2) improved profit margin coming from successful implementation of cost control and productivity improvement measures, (3) acquisition pipeline of businesses to leverage on SATS' core competency. We upgrade SATS to "Accumulate" rating, with new higher target price of S$4.05. (Previous: S$3.36) We also anticipate higher full year dividends of 17.0 Cents being declared for FY16e, vs. 14.0 Cents in FY15.

ource: Phillip Securities Research - 5 Nov 2015