• 9MFY18 within expectations
• Partnerships to drive long-term growth
• Re-engage closer to S$5.05 and lower

Core 9MFY18 PATMI Met 75.8% of FY Forecast

SATS Limited’s (SATS) 3QFY18 core PATMI, which excludes the S$4.5m write-back for the lapsed earn-out consideration for the acquisition of additional stake in MacroAsia Catering Services, fell 4.6% YoY to S$62.1m. Revenue was flat YoY at S$439.8m as decline in Food Solutions (-2.5%) was offset by growth in Gateway Services (+2.6%) despite the deconsolidation of SATS HK (SHK) in Jul 17. 3QFY18 operating expenses came in flat YoY at S$374.1m as deconsolidation impact of SHK was offset by higher underlying operating expenses including higher fuel costs and lower grants. Share of after-tax profits from associates/JVs rose 7.9% YoY to S$13.7m driven by food solutions associates/JVs.

For 9MFY18, revenue fell 0.2% YoY to S$1301.1m but underlying revenue would have increased 1.3% if not for deconsolidation of SHK. 9MFY18 operating expenses rose 0.2% to S$1120.8m on higher licence fees, depreciation and amortization charges and other costs. Share of after-tax profits from associates/JVs jumped 29.7% YoY to S$47.2m. Consequently, 9MFY18 core PATMI grew 1.0% YoY to S$184.6m.

Wait for Update on Its Potential Partnership With THY

We believe a near-term catalyst for SATS would be if it does enter into a partnership with Turkish Airlines (THY). Recall that this potential partnership relates to the provision of in-flight catering services to THY and other airlines at Istanbul New Airport. In our view, we believe it makes sense as THY will be able to provide large enough volume for SATS to invest into a catering company at the Istanbul New Airport, which could possibly be the largest flight kitchen in the world.

Over the longer-term, we remain positive over SATS’ outlook driven by its strategy to diversify out of Singapore and into non-aviation business segments through several overseas partnerships, including but not limited to the ones with Wilmar in China and AirAsia at Changi Airport T4.

Unchanged FV of S$5.50

On aforementioned reasons, we prefer to wait for clarity over SATS’ potential partnership with THY, and opt to keep our FV unchanged at S$5.50 given this in-line set of results. We believe investors should position themselves to accumulate at better entry levels, closer to S$5.05 and lower.

Source: OCBC Research - 14 Feb 2018