• Core FY17 met 96% of FY estimate
• Looking out of Singapore to drive growth
• Maintain HOLD

Revenue Growth Driven by Gateway Services

SATS Limited’s (SATS) FY17 core PATMI, which excludes one-off items (e.g. the S$15m negative goodwill recorded in 4QFY17 due to increase in stake in long-term investment), came in largely within expectations as it increased 7.4% to S$234.3m and formed 96% of our forecast. Revenue rose 1.8% to S$1,729.4m, mainly attributable to growth across Food Solutions (+0.6%) and Gateway Services (+3.4%), which recorded a 7.6% increase in cargo/mail processed in FY17.

Operating expenses, however, grew at a slower pace than revenue, mainly driven by higher staff costs due to service increment and higher subcontract costs to support increased business volumes but mitigated by fall in cost of raw materials with the transfer of food distribution business to its JV.

Consequently, operating margin improved from 12.6% in FY16 to 13.3% in FY17. SATS is recommending a final dividend of S$0.11, bringing the total dividend for FY17 to S$0.17 (FY16: S$0.15).

Challenging Conditions Persist in Aviation Industry

Looking ahead, management noted a few factors that may potentially result in lower margins for SATS:

1. falling yields of airlines translating to pricing pressure for SATS,
2. non-recurring items recognized this year will be difficult to exceed in FY18 from just increasing productivity,
3. lower government subsidy of staff costs,
4. cessation of franchise fee rebates with effect from 1 Apr 17,
5. higher depreciation as capex is expected to continue to increase, and
6. rest of costs to rise, in-line with growth of business.

Hence, we believe near-term growth will moderate along with margins under pressure. Over the longerterm, along with the growing capacity of Changi Airport, we continue to expect SATS’ strategy of diversifying out of Singapore through partnerships and/or M&A activities to drive positive growth.

Higher FV of S$5.12

With in-line FY17, we opt to keep our forecasts largely unchanged. However, we switch from DDM-based to DCF-based valuation method to reflect its steady positive long-term growth outlook, and raise our FV from S$4.70 to S$5.12. Maintain HOLD, but would look to re-engage closer to S$4.70 or lower.

Source: OCBC Research - 22 May 2017