• Weak performance in Japan
• Impacted by cessation of rebates
• Maintain HOLD on lower FV

Core 1QFY18 Met 23% of Our FY Estimate

SATS Limited’s (SATS) 1QFY18 core PATMI, which excludes one-off items (e.g. the S$9.3m gain from disposal of the Senoko plant recorded in 1QFY17), was largely in-line with our expectations as it increased 3.2% YoY to S$57.2m and formed 22.8% of our forecast. Revenue grew slightly by 0.5% YoY to S$426.5m, mainly attributable to growth in Gateway Services (+5.1%) but offset by weak Food Solutions (-2.9%), which was impacted by weaker operations in Japan due to cut back in flights (i.e. lower volume) by the some customers of its Japan’s subsidiary, TFK.

Operating expenses, however, grew 0.9% YoY to S$373.0m, mainly driven by higher licence fees due to cessation of rebates given by Changi Airport. Consequently, 1QFY18 operating margin fell 0.3ppt YoY to 12.5% while core PATMI margin improved by 0.3ppt to 13.4%.

Declining Yields of Airlines Put Pressure on Margins

Looking ahead, persistent decline in yields of airlines, along with lower government subsidy of staff costs, cessation of franchise fee rebates, and higher depreciation will continue to exert pressures on SATS’ margins. TFK continues to face headwinds in Tokyo airports due to overcapacity of caterers and volume may remain weak as long as its customers do not reinstate the flights they cut in 1QFY18.

With Changi Airport still recording healthy growth across passenger, aircraft and cargo traffic, we expect SATS’ GS revenue to grow in tandem as well. All said, we continue to expect near-term revenue growth to moderate and believe SATS’ strategy of diversifying out of Singapore through partnerships and/or M&A activities will help drive longer-term growth.

Lower FV of S$5.05

While 1QFY18 was within expectations, on aforementioned reasons, we pare our FY18 and FY19 PATMI forecasts by 4.5% and 3.9%, respectively. Consequently, our DCF-derived fair value estimate decreases slightly from S$5.12 to S$5.05. Maintain HOLD, but would look to reengage closer to S$4.70 or lower.

Source: OCBC Research - 24 Jul 2017