• Flattish underlying net profit in 2Q
• Near-term challenges
• Bright long term prospects

2QFY19 Results in Line

SATS Ltd delivered a 4.2% YoY rise in revenue to S$453.1m and a 9.0% decrease in net profit to S$65.7m in 2QFY19. Underlying net profit was also S$65.7m, which was a 0.8% YoY rise. 1H18 net profit was S$129.6m, which was 51% of our full year figure and in line with expectations. Food Solutions’ revenue rose 2.5% to S$250.9m while Gateway Services’ revenue was higher by 6.3% at S$201.6m.

Excluding the deconsolidation impact of SATS HK, underlying revenue would have improved by 5.2%. The 9.0% fall in net profit was due to absence of a S$7m gain on disposal of assets held for sale comprising the deconsolidation of SATS HK, restructuring of Jilin Zhong Xin Cheng Food and SG IPF Pte Ltd, as well as lower contributions from associates/JVs.

Non-aviation Did Well in 1HFY19

Non-aviation revenues rose by 10.1% in 1HFY19 to S$123.3m compared to aviation’s 2.7% increase to S$769.2m. Under non-aviation, the cruise segment did well in 1HFY19, with 113 ship calls handled compared to 33 ship calls in 1HFY18. There is further room for growth considering the relatively low utilisation of the cruise centre and over time should there be more demand, there could be the possibility of additional berths as well.

Near-term Challenges, Positive Long Term Outlook

Trade tensions and weaker sentiment have impacted emerging market currencies and trade volumes. At the same time, higher oil prices and competition in the airline industry should continue to result in pricing pressures on SATS. Notwithstanding the short term challenges, the longer term outlook remains positive with aviation volumes and demand for safe, quality food set to increase. SATS also intends to pursue organic and inorganic growth opportunities.

Meanwhile, the share price has appreciated by about 4% vs. the STI’s 2% fall since our upgrade to Buy in mid Sep. With the limited upside potential, we downgrade our rating to HOLD with an unchanged FV of S$5.39. An interim dividend of S$0.06/share has been declared, which is the same as last year.

Source: OCBC Research - 9 Nov 2018