SATS

KE on 12 Feb 2014


Disappointing numbers
SATS reported a muted set of numbers for 3QFY3/14, with net income declining by 8.7% YoY to SGD42.9m on a 1.1% YoY contraction in revenue to SGD465.5m. Revenue shrank as a result of 1) lower contributions from subsidiary TFK Corp as the JPY fell 17% against the SGD during the period, and 2) lower unit meal volumes (-5.7% YoY) at its inflight catering operations in Singapore. The weakness in its aviation business was offset by higher non-aviation revenue (+9.2% YoY) on improved contributions from Marina Bay Cruise Centre. The key source of earnings disappointment came from weaker profitability at its core operations in Singapore as rising labour costs continued to weigh on margins. On the bright side, management said that TFK has seen its meal volumes and profit contributions improving following the renewal of its contract with Japan Airlines.

Labour costs pose near-term headwinds
While productivity initiatives to address rising labour costs will better position SATS in the long run, we still see near-term headwinds from labour costs and cut our FY3/14E-16E earnings forecasts by 11-16% to reflect this. Management declined to commit on its dividend outlook, but we expect FY3/14E DPS to be lowered to 14.0 SGD cents in view of the contraction in earnings for the year. While near-term cost pressure will persist, we remain positive on SATS’ long-term outlook as a proxy to the structural growth story at Changi Airport. We reiterate our BUY call but cut our DCF-based TP to SGD3.47 (WACC = 7.6%, tg= 1.0%) from SGD4.00 previously.