• Underlying revenue growth
• Solid growth in core PATMI
• Maintain HOLD

Growth in underlying revenue for both key business segments

SATS Limited (SATS) started FY17 well as 1QFY17 results came in slightly better than our expectations. 1QFY17 revenue grew by 1.8% YoY to S$424.2m, mainly attributable to 4.7% growth from Gateway Services (GS), but partly offset by a 0.5% decline from Food Solutions (FS) due to transfer of food distribution revenue to JV. Excluding the transfer of business to JV, 1QFY17 revenue would have increased 8.6% YoY while FS revenue would have grown 11.4%.

1QFY17 operating expenses fell by 0.9% YoY to S$369.7m mainly due to decline in cost of raw materials with the transfer of food distribution business to JV and lower energy costs, but partially offset by higher staff costs to support the growing business (especially Japan) and the YoY strengthening of JPY against SGD.

However, 1QFY17 share of profits from associates/JVs declined 4.7% YoY to S$12.2m mainly due to dilution of stake in Beijing associate. Consequently, 1QFY17 core PATMI posted a solid 17.6% YoY growth to S$55.4m.

Turnaround in Japan subsidiary

As a result of continuous productivity drive through investments in technology to increase operating leverage, SATS’ 1QFY17 margins continued to improve, as EBIT and EBITDA margins increased 2.2ppt and 2.4ppt YoY to 12.8% and 17.3%, respectively. In addition, SATS’ subsidiary in Japan, TFK, also saw a turnaround in 1QFY17 as revenue grew 36.2% YoY mainly due to restructuring efforts bearing fruits and ramp up of contributions from its catering contract with Delta Air Lines in both Narita and Haneda airports in Tokyo.

Going forward, we expect SATS to continue growing steadily on: 1) higher airline loads despite weak yields, 2) productivity drive to improve profitability, especially in Japan, and 3) longerterm growth driven by non-aviation businesses.

Supported by 3.7% FY17F dividend yield

With slightly better than expected results, we increase our FY17F and FY18F core PATMI forecasts by 1.5% and 3.5%, respectively. As we still expect stable growth in dividends, our DDM derived FV remains unchanged at S$4.20. Maintain HOLD.

Source: OCBC Research - 22 Jul 2016