• SATS LTD. (SGX:S58)'s 4Q19 profit of S$49.9m missed consensus and our expectations due to one-off (-S$2.1m) in associates/JV. SATS core operations remained robust.
• Final DPS was a positive surprise at S$0.13, bringing total DPS to S$0.19, a decent 4% yield. SATS had net cash of S$254m at end FY3/19.
• Inorganic growth could be the key catalyst for SATS. It acquired a 50% stake in an airlines frozen food business in Nanjing for S$31m.
• Maintain ADD.

Associates Not as Bad as It Looks, Expect +3% Y-o-y in FY20F

• SATS LTD. (SGX:S58)'s FY19 net profit of S$248m was below at 92% of our forecast and 96% of consensus.
• 4Q19 associates profit of S$8.9m (-63% y-o-y, -57% q-o-q) included S$3.3m provisions for doubtful debts and asset write-down as well as S$1.2m share of DFASS SATS profits from disposal of KrisShop. Stripping EIs, associates profit for 4Q19 was S$11m (+11% y-o-y), partly due to consolidation of its AirAsia associate, Ground Handling Team Red Holdings (GTR).
• Franchise fee in Indonesia was successfully passed-through to customers in 4Q19 but cargo business was affected by trade tension.
• We lower our associates profit forecast to +3% y-o-y growth to S$61m in FY20F (previously S$74m).

Consolidation of GTR Could Add S$8m in Operating Profit P.a

• SATS has started to consolidate GTR entities (previously equity accounted in gateway associates). In 4Q19, S$21.3m/S$19.4m of revenue/opex was consolidated (operating profit: S$1.9m). GTR’s margin of 9% was lower than SATS’ existing gateway business (10%) due to costs incurred to build the cargo handling business in KL, in 4Q19.
• We forecast S$8m OP p.a. from GTR. As the cargo handling business only ramped up in 4Q19, the consolidation of GTR will not cause a major drop in gateway associates in FY20F but SATS staff costs will go up by S$14m/qtr.

Stronger Operating Profit, EBIT Margin Improved for the 5th Year

• Our comments here exclude the effects of GTR consolidation. SATS delivered a fourth consecutive quarter of y-o-y revenue growth (6%) in 4Q19, better than expected, driven by food solutions (+7% y-o-y) and gateway (+5% y-o-y). Accordingly, operating profit was up 6% y-o-y to S$48.9m in 4Q19, mainly from savings in raw materials costs (only up 3% y-o-y).
• EBIT margin in 4Q19 was flat y-o-y and weaker seasonally at 10.8% but expanded to 13.5% in FY19 (FY18: 13.1%), on track with management target to improve yield.

China Acquisition Looks Earnings Accretive

• SATS also announced the acquisition of a 50% stake in Nanjing Weizhou Airline Food Company at S$31.2m (cash and shares), to be completed by Aug 19. No financial details were given but on a 25x P/E assumption, the deal could add S$1m-2m to its profit.

Maintain ADD With a Target Price of S$5.46, Based on 21x CY20F P/E

• We cut our FY20-21F EPS by 4-5% on lower associates.
• Our Target Price is based on its 3-year g valuations.
• Sizeable M&A is key catalyst.
• Economy slowdown is a risk.

Source: CGS-CIMB Research - 17 May 2019