• 1HFY17 met 49.3% of FY estimate
• Still looking to improve productivity
• Increase in interim dividend to 6 Scents

Stronger JPY against SGD helped lift TFK revenue growth

SATS Ltd’s (SATS) 2QFY17 core PATMI grew 4.0% YoY to S$62.1m on the back of a 3.7% increase in revenue to S$438.5m. 2QFY17 revenue was driven by: 1) Food Solutions (FS), which rose 4.0% YoY mainly due to better performance from its Japan subsidiary, TFK, and 2) Gateway Services (GS), which grew 3.4% with more flights handled. TFK’s 33.6% revenue growth was mainly attributable to strengthening of JPY against SGD and from the Delta contract secured in Jun 15.

2QFY17 operating margin improved by 0.5ppt YoY to 14.5% largely due to improvement after the transfer of food distribution business to its JV, SATS BRF Food (SBRF). 2QFY17 core net margin was largely flat at 14.2%, as operating expenses increased 3.1% YoY across most categories. For 1HFY16, SATS’ revenue grew 2.8% YoY to S$862.7m while core PATMI came in within our expectations as it rose 10.1% to S$117.6m, which formed 49.3% of our FY17F forecasts. SATS has also proposed an increase in interim dividend to 6 S-cents for 1HFY17 (1HFY16: 5 S-cents).

SATS eCommerce AirHub a growth driver

SATS’ long-term growth prospects remain positive as previously highlighted, mainly on its efforts in forming partnerships overseas to diversify away from business concentration in Singapore. With SATS eCommerce AirHub (highly automated facility to handle mails and parcels) scheduled to be complete early FY17, we believe SATS is also well poised to ride on the eCommerce growth in Singapore. Having signed a long-term agreement with SingPost, SingPost will shut down its own cargo handling facility at airport and utilize SATS’ new facility, contributing to the volume increase at the start. We believe SATS will be a potential beneficiary, if SingPost leverages on its relationship with Alibaba to drive up eCommerce volume in the long-run.

Maintain HOLD on unchanged forecasts

With in-line 1HFY17, we opt to keep our forecasts unchanged and maintain our FY16 dividend assumption of 16 S-cents. With an unchanged FV of S$4.70, maintain HOLD. However, we are still positive on SATS’ longterm growth outlook and would look for buying opportunities below S$4.40.

Source: OCBC Research - 11 Nov 2016