• No surprises from FY16 results
• Diversifying away from Singapore
• No near-term impact; maintain HOLD

Productivity drive helped improve FY16 margins

SATS Limited (SATS) ended its FY16 with no surprises as FY16 core PATMI was within expectations; it rose 11.3% to S$220.5m and formed 99.3% of our forecast.

FY16 revenue fell by 3.1% to S$1,698.2m, due primarily from Food Solutions (FS) where revenue declined 8.0% on transfer of food distribution revenue to JV and weakening of JPY against SGD, but partly mitigated by higher Gateway Services (GS) revenue.

Excluding the transfer of food distribution business to JV and divestment of the Urangan business, FY16 revenue would have increased 3.0%, driven by both FS (+2.3%) and GS (+4.1%).

FY16 operating expenses fell at a faster pace than revenue as a result of tight cost management, productivity drive and lower energy costs. Consequently, operating margin improved from 10.2% in FY15 to 12.6% in FY16, resulting in a 20.6% increase in FY16 operating profit to S$214.7m.

Execution of expansion strategy key to long-term growth

In the near-term, we believe SATS’ continuous efforts on tight cost management and productivity gains through adoption of new technology and relevant training for its employees will help sustain its operating margins. For its aviation business, we do see growth in Singapore driven by expansion; terminal 4 and 5, when combined, will double Singapore’s Changi Airport existing capacity.

While airlines are facing a weak yield environment, we do note that loads had been increasing. Especially for Southeast Asia, with many emerging economies, we believe SATS’ presence in countries like Indonesia, Philippines, and most recently, Malaysia, will benefit from the rise of the middle class, which increases demand for air travel over the medium to longer-term.

We also like SATS’ strategy in diversifying away from its concentration in Singapore, as well as into adjacent and nonaviation businesses, through partnerships and JVs to enter new markets and businesses.

Decent 3.8% FY17F dividend yield

All said, with no concrete impact from these JVs in the near term, we forecast for a steady growth outlook on improving margins, which consequently increases our FV from S$4.00 to S$4.20. Maintain HOLD.

Source: OCBC Research - 24 May 2016