• 9% down since downgrade and results
• Dividends sustained by healthy cashflows
• Bright long term prospects

Share Price Correction Since Earlier Part of Nov

Post our downgrade on 9 Nov and the release of its 2QFY19 results, the share price of SATS Ltd has dropped by 9.1% compared to the STI’s 0.2% fall over the same period, based on the closing price on 28 Nov. Recall that results were in line with our expectations, with 1H18 net profit accounting for 51% of our full year figure. Underlying net profit was flattish in 2QFY19.

We had downgraded our rating for the stock due to the limited upside potential post share price appreciation, but now with the recent correction, value is emerging again.

Ample Cushion for Dividends to be Sustained; Expected 4.1% Yield

The company has been steadily increasing its dividends over the years since FY13, backed by an average 6-7% earnings growth per year since then. Dividends paid over the past five years range from S$145m to S$190m, backed by operating cash flows of ranging from S$275m to S$330m per year.

Investing cash flows have averaged S$135m per year over the past five years. This shows there is ample cushion for dividends to be sustained, and sufficient room for investments as well. There is currently an expected dividend of about 4.1% for the stock.

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.

The stock is currently trading at 19x forward P/E, which is the lowest since Jul 2016; the peak was 24.5x in Jan this year. We fine-tune our estimates and our FCFE-based fair value estimate slips slightly from S$5.39 to S$5.34.

Source: OCBC Research - 29 Nov 2018