• 1QFY20 results missed expectations
• Flat core revenue
• Japan TFK to ride on 2020 Olympics

PATMI Missed; Revenue Was In-line

SATS 1QFY20 PATMI fell 14.4% YoY or S$9.2m to $54.7m, which formed ~20% of our full-year estimate. The decline was driven by lower operating margin and lower contribution from the share of results from associates and JV. Revenue, however, grew by 5.8% YoY to S$465.1m which was broadly in-line, at ~24% of full-year forecast.

The increase was driven by growth in both Food Solutions and Gateway Services, partially offset by lower cargo revenue, the suspension of the Jet Airways and also the grounding of the 737 MAX.

Growth Was Driven by the Consolidation of GTR Entities

Revenue from the Food Solutions was up S$1.9m or 0.8% YoY to S$241.4m, mainly attributable to the growth in core aviation catering subsidiaries in Japan and Singapore. Gateway Services also saw a growth of S$23.7m or 11.9% YoY to S$223.3m, driven by the consolidation of GTR entities, Ground Team Red Holdings Sdn Bhd and Ground Team Red Sdn Bhd, which contributed $22.5m. Excluding the impact of the consolidation of GTR entities, 1QFY20 gateway services revenue and core revenue would remain relatively flat at S$200.8m (+0.6% YoY) and S$442.5m (0.7% YoY) respectively.

Lower Operating Margin

Operating margin was down 2.6% YoY to 12.2%, dragged by i) lower cargo revenue which tends to have relatively good margins and particularly strong operating leverage; ii) the suspension of Jet Airway in India and iii) higher expenses mainly due to the consolidation of GTR. Group expenditure increased by S$33.8m or 9.0% YoY to S$408.3m, of which GTR accounted for 20.6% of the increase.

Lower FV Estimate of S$5.28

The slowing economy could continue to weigh on cargo revenue, and put pressure on cargo margin. Aviation passenger volumes in Asia, and the number of flights handled are still growing, though at a slower rate. Management sees this rising trend to continue despite the headwinds. In addition, we expect the growth in Food Solutions to continue, with Japan TFK gearing up for the 2020 Tokyo Olympics by doubling its capacity with a new inflight kitchen to better serve Haneda and Narita International Airport. We fine-tune our estimates and our FCFF-based fair value estimate slips from S$5.35 to S$5.28.

Source: OCBC Research - 22 Jul 2019