SATS

Kim Eng on 8 Feb 2012

Slightly below. SATS’ 3Q12 headline net profit came in at $38.2m, down 25.4% but underlying profit was an 8.6% decline to $43.7m after adjusting for the disposal of Daniels, including a one-off write-down of $5.5m. Core earnings were slightly below our forecasts, as TFK’s recovery was slower than expected, and costs have not come off significantly as yet. On balance, however, the numbers were still solid. SATS remains a Buy with a target price of $2.70. Basic dividend yield is attractive at 5%, and we do not exclude the possibility of a special dividend derived from the proceeds from the sale of Daniels.

Revenues remain robust. 3Q12 revenue grew 32.3% YoY. On a sequential basis, revenue grew by 4.2%. Gateway services notably recorded a 10.5% YoY growth in revenue due to the growth in flights, while revenue from food solutions rose 49% YoY. TFK’s revenue was $82m for 3Q12. This remained a steady improvement over 2Q, as operations continue to recover from the Japan earthquake. Operating profit remained in the $1.5m range, as the recovery in earnings is taking longer than we had expected. Despite this, we expect TFK to be a far more significant contributor to earnings in the future.

Costs flat, but not softened. Staff costs have been well contained despite the growth in revenue. Raw material costs have also remained flat, but this is actually a slight disappointment as our expectation was that food prices would start to come off by now. However, management remains optimistic that raw material costs can still be contained with better management for the moment. We still anticipate some softening of this in the coming months.

Target price still $2.70. We adjust our FY12 forecasts solely for the reconsolidation. Management has raised the possibility of paying out some of SATS’ $421m net cash hoard, (enlarged by the proceeds from the sale of Daniels), by way of additional dividends. Nevertheless, our base dividend yield already stands at an attractive 5%. We maintain our Buy recommendation and target price of $2.70.