• 3.5% rise in 3Q net profit
• Volume growth in Food Solutions
• Investing in China

In-line Results

SATS Ltd reported a 5.5% YoY rise in revenue and a 3.5% increase in net profit to S$68.9m in 3QFY19, bringing 9MFY19 net profit to S$198.5m or 78% or our full year estimates, within expectations. Excluding one-off items, underlying net profit was S$63.1m in the quarter, while the 9M figure was S$192.7m. In 9MFY19, revenue from Food Solutions increased 3.4% to S$742.8m, with contributions in part by S$6.5m or 3.6% growth in the Japan business and S$3.9m or 163% growth in the non-aviation business in China.

Gateway Services’ revenue improved by 5.3% to S$612.5m, driven by volume growth in flights handled as well as higher contribution from cruise terminal operations. As growth in revenue outpaced expenditure growth, operating profit grew by 8.8% in the nine months.

Opportunities and Challenges in Food Solutions

Despite the slowdown in the global economy, increasing volumes in the aviation industry and strong demand for convenient food in Asian cities are creating growth opportunities for SATS. With regards to this, the group is well-positioned to extend its market leadership in Asia Pacific, especially in the large, dynamic markets.

This is likely to lead to volume growth for SATS. However, competition in the airline industry continues to result in pricing pressures on SATS and this is expected to continue.

China Gaining Prominence

China is a key market with its scale and connectivity, and SATS has invested in ground and cargo handling, and catering operations at the new Daxing International Airport in Beijing. In addition, it is also building new central kitchens in China to supply fast casual restaurant chains in key cities.

Indeed, on a geographical basis, Singapore accounted for 63% and 66% of the group’s total revenue in FY18 and FY19, respectively. This was followed by Greater China at 10.3% and 11.3%, and Japan at 10.4% and 10.0%. ASEAN (ex-Singapore) and India were other key segments, and the group’s new ground and cargo handling ventures in India and Malaysia are also growing profitably.

We maintain our HOLD rating and fair value estimate of S$5.23 on SATS.

Source: OCBC Research - 14 Feb 2019