SATS Ltd

Kim Eng on 31 Jan 2013

Downgrade to HOLD on valuations, 3Q a weak peak. SATS reported 3Q results which were slightly below expectations, as 9MFY3/13 PATMI of SGD138.6m comprised only 71% of our full-year estimates. We downgrade SATS to a HOLD premised on its share price run-up, which would have netted investors a cool 52% total return (including SGD0.26 of dividends) following our upgrade just over a year ago, as well as trimmed forecasts which imply a slightly lower Target Price of SGD3.03. We believe SATS is fairly valued at current levels, while existing investors continue to enjoy dividend yields of ~5.5%.

3Q affected by weak freight, cost increases. 3QFY3/13 revenues were only up 2% QoQ, which hardly made for an expected seasonal peak. This was attributed largely to a poor air freight demand environment. 3QFY3/13 PATMI was 7% down QoQ, as cost increases (+3.5% QoQ) outpaced revenue growth.
Margins under pressure, but still holding up. Margins held up in 3QFY3/13: on a YoY basis PBT Margins improved 0.3 ppts, while PATMI margins were relatively flat (increasing 0.1 ppts). 9MFY3/13 margins were still marginally down YoY.

Gaining market share. Another bright spot for SATS was the outperformance in operational indicators versus those of Changi Airport in the 3QFY3/13 period. In terms of passengers, aircraft, and freight handled, SATS performed better in terms of YoY growth which implies a gain in market share.

Decent yield despite price run-up, HOLD. The relatively disappointing 3Q results, in addition to the stellar share price run-up have led us to downgrade SATS to a HOLD based on valuations. We have also trimmed our FY3/13-15 profit forecasts by 6-8%, primarily from cost pressures we think might persist going forward. Target Price is accordingly adjusted to SGD3.03, as we maintain our forward PER valuation pegged at 1 SD above historical mean (17x FY3/14).