SATS recorded a decline of 2.8% YoY in 1QFY13 PATMI to S$41.3m, as revenue grew 13.6% to S$437.9m. The results were in line with expectations.  Included in 1QFY12 results was a one-off gain from the write-back of retirement benefit plan obligations,  relating  to  TFK  (S$10.1m).  Excluding  this  one-off  item  and  the  loss from  discontinued  operations  (UK  business),  its  underlying  PATMI  was  3.8% higher  YoY.  We  raise  our  DCF-based  TP  to  S$2.63  (from  S$2.57),  taking  into account  the  positive  outlook  for  SATS  vis-''-vis  the  global  economic  outlook, backed by regional traffic growth. Maintain NEUTRAL.

Food Solutions helped by improvement from TFK. 1QFY12 was just after the Triple  Disaster  in  Japan,  which  had  impacted  TFK's  business  volume  then. Business has picked up steadily over the past few quarters, and TFK turned in a 40.7%  YoY  increase  in  revenue.  Its  aviation-related  food  business  also  saw  a healthy growth of 15.7% YoY, as air travel grew. Although Ground Handing/Cargo business  was  up  8.1%  YoY,  it  was  flat  compared  with  4QFY12,  signaling  the softening  demand.  Demand  in  the  cargo  segment  is  expected  to  remain  weak over the next two quarters.

Cost  pressures  are  likely  to  remain,  although  SATS  plans  to  actively  manage costs.  The  bulk  of  its  cost  base  is  staff  cost  and  food  raw  materials.  With  wage inflation,  increased  headcount  and  additional  government  levies,  staff  costs  are likely  to  remain  at  current  level  (~44%  of  Group  revenue).  Hence,  margins  are expected  to  continue  being  under  pressure.  SATS  achieved  PBT  margins  of 11.6% in 1QFY13, vs 12.4% in 1QFY12.

Maintain NEUTRAL. The ICT has started operations, but positive contribution is only likely from FY14. We continue to like SATS for its stability and strong balance sheet (net cash of 12.5 S''/share, after taking into account the S$233m that would be paid out as dividends in 15 Aug 12).

Source: OSK