• Core 9MFY17 met 75.3% of FY estimate
• Accelerating productivity improvement
• Maintain HOLD

Higher air cargo volume handled in 3QFY17

SATS Ltd’s (SATS) 3QFY17 core PATMI grew 7.4% YoY to S$65.1m on the back of a 1.3% decrease in operating expenses to S$374.2m and 9.5% growth in contributions from associates and JVs, despite flat revenue of S$440.9m. SATS’ 3QFY17 Gateway Services (GS) revenue grew 2.2% YoY on higher air cargo volume handled, largely due to Hanjin Shipping’s bankruptcy while Food Solutions (FS) saw a 1.8% revenue drop due to a weaker non-aviation segment.

The increase in air cargo volume also contributed to the 9.9% YoY improvement in its GS JVs and associates’ 3QFY17 revenue. TFK’s 4.5% revenue growth was mainly attributable to strengthening of JPY against SGD, new contracts secured and productivity efforts. 3QFY17 operating and net margins both improved by 1.1ppt to 15.1% and 14.8% YoY, respectively.

For 9MFY17, SATS’ core PATMI met our expectations as it grew 9.1% YoY to S$182.7m, mainly on the back of a 1.8% growth in revenue to S$1303.6m. 9MFY17 operating expenses rose 0.3% YoY to S$1118.8m due to staff costs and higher depreciation and amortisation charges but partly offset by lower energy and higher grants.

Challenging operating environment for aviation segment

With airline margins under pressure and likely to persist due to intense competition, we believe this will translate to pricing pressure for SATS and in turn affect its aviation segment margins. Hence, management highlighted they will look to accelerate automation and invest in technology to improve productivity. As for SATS’ JV with Wilmar, the first kitchen facility just outside Shanghai is on track to start commercial food production by end FY17.

We believe this JV business will help SATS diversify to non-aviation segments, assuming it is well executed. Management has also highlighted that they will continue to look for opportunities outside Singapore and develop new ventures outside aviation.

Unchanged FV of S$4.70

With in-line 9MFY17, we opt to keep our forecasts largely unchanged. Maintain HOLD with the same FV of S$4.70. However, we remain positive on SATS’ long-term growth outlook and would look for buying opportunities closer to S$4.40.

Source: OCBC Research - 10 Feb 2017