SATS Ltd

CIMB Research, 30 Jan2013

Q3 FY2013 was characterised by broad-based revenue growth and good cost control. The group's balance sheet remained healthy and cash flows stayed strong. SATS's latest set of results reaffirms our thesis of earnings growth driven by volume gains and margin stability.

Nine-month FY2013 profits met expectations at 75 per cent of our full-year forecast and 73 per cent of consensus. We keep our EPS and S$3.32 target price (16.8 times CY2014 PE, one standard deviation above its eight-year mean), and reiterate our "outperform" rating. Potential re-rating catalysts are strong volumes through Singapore's Changi Airport, coupled with a potential dividend surprise.

We expect strong intra-Asia travel to propel SATS's revenue. Q3 FY2013 revenue rose 6 per cent, supported by growth from food (+6 per cent) and gateway services (+7 per cent). Costs were well controlled, with accelerating staff expenses balanced by tight cost control elsewhere. Net profits rose correspondingly by 8 per cent. Including losses from Daniels Group last year (which has since been disposed of), the magnitude of its profit growth would have been higher at 24 per cent.

Third ground handler ASIG's inability to garner market share at Changi Airport suggests that the risk of margin erosion arising from competition is low. SATS's net profit margin inched up 0.1 percentage point to 10 per cent, thanks to tight cost control, which helped to negate higher staff costs arising from increased headcount and levies. In particular, the proportion of expenses spent on food declined, reaffirming our view of easing food inflation.

The group remains in a net cash position with positive free cash flows. We project a 70 per cent dividend payout ratio, but see room for surprises given its strong balance sheet.

OUTPERFORM