SATS Ltd

DBS Group Research, July 26

SATS Ltd's net profit grew 11.9 per cent to S$46.2 million while revenues dipped 0.8 per cent to S$434.5 million.

There was a S$3.8 million tax writeback in the quarter and it booked S$1.7 million impairment charge on assets held for sale.

Excluding these items, net profit would have registered lower 6.8 per cent y-o-y growth to S$44.1 million.

Q1 FY2014 revenues were affected by lower contribution from food solutions (down 5.6 per cent), partly offset by higher gateway contribution (up 7.9 per cent).

The weaker food solutions contribution was due to a 22 per cent drop in TFK's revenues as a result of a weaker yen and lower load factor amid strained Sino-Japan relations.

Food solutions revenue was also affected by a 6.6 per cent dip in unit meals uplifted, largely a result of Qantas moving its European flights to Dubai, from Singapore.

Qantas has redrawn about 52 flights a week, which accounts for about 2 per cent of total flights handled by SATS.

The dip in revenue was mitigated by lower operating expenses (down 1.2 per cent).

The drop in operating expenditure was led by lower raw material costs (down 2.8 per cent), depreciation (down 14.7 per cent), premise and utilities expenses (down 7.6 per cent), and others down 2.5 per cent).

Q1 FY2014 earnings were in line at about 22 per cent of our FY2014 forecasted profit, similar to the year-ago quarter.

There is little scope for share price upside in view of moderating passenger traffic growth and declining airfreight volume.

However, this should be mitigated by its commitment to manage costs, as well as relatively attractive yields.

SATS is currently trading at above one standard deviation of its historical PE band, in line with regional/global peers' average.

We call a "hold" on SATS Ltd. Our target price (S$3.29) is the average of the values derived from our discounted cash flow model and PE valuation model (16 times FY2014/15 EPS).

HOLD