SATS Ltd

DBS GROUP RESEARCH on 7 Nov 2012

Q2 within expectations: SATS posted Q2 net profit of $50.3 million (+25.4 per cent y-o-y) on revenue growth of 8.8 per cent to $461.5 million. Excluding one-off items and Daniel's Group (divested on Oct 25, 2011), core profits increased by 9.3 per cent to $50.7 million. H1 net profits account for 49 per cent of our FY2013F forecast. An interim dividend per share of 5 cents was declared, similar to last year and in line with our expectations.

Revenue growth came from both Food Solutions (+9.3 per cent) and Gateway Services (+7.9 per cent), largely on the back of higher passenger (+5 per cent), flights handled (+5.5 per cent) and unit inflight meals served (+5.6 per cent). This was offset partially by weaker cargo volumes, which saw a 3 per cent dip in tonnage given the weak economic outlook. Management guided for continued weakness in air cargo throughput.

Improved Group Ebit margins as TFK saw margins expansion, albeit from low base: The group's Ebit margins improved to 11.3 per cent, +1 percentage point from a year ago. This came from TFK which continued improving its operations, posting Ebit of $5.2 million, up from $1.8 million in Q2 2012 and $2.6 million in Q1 2013, resulting in a margin of 5.8 per cent in Q2 2013 (Q2 2012: 2.3 per cent). The group's other operations (ex-TFK), however, saw flat Ebit margins arising from higher staff and other costs, but mitigated by lower raw material costs.

Our view: Labour costs challenge could limit further margin expansion. We continue to expect labour cost pressure to cap significant margin expansion in the near term, though this could be offset partially by lower raw material costs. We expect Ebit margins to hover around H1 levels, and have projected it at about 10.3 per cent for FY2013F.

Minor impact from Sino-Japanese relations on TFK: The recent tension between China and Japan could have a slight impact on TFK's operations, but management expects it to be marginal at this stage. In our view, this could momentarily stall the improvement in TFK's operations but should not impact it to the same extent as the March 2011 Japan earthquake.

Recommendation: We maintain our "hold" recommendation, but revise our PE/DCF backed TP up marginally to $2.62 as we roll our PE valuations to average of FY2013F/2014F. We believe valuations, trading marginally above the historical mean, are not compelling, but its share price should continue to be supported by a yield of 4.7 per cent (FY2013F).
HOLD