SATS

Kim Eng on 22 July 2014

• Downgrade to SELL with revised TP of SGD2.50, based on 16x FY3/15E P/E.
• We expect near-term earnings to be dampened by escalating costs and a weak air cargo business.
• Sparked by another quarter of weak earnings performance in 1QFY3/15, consensus estimates could be cut by up to 10%. .

Another quarter of earnings disappointment
SATS reported a weak 1QFY3/15 underlying net income of SGD43.4m (-9.4% YoY) despite a 14.6% YoY reduction in depreciation charge arising from an accounting change. Labour costs remained the key pressure point in 1QFY3/15, rising 3.0% YoY, amid a stagnating top-line. Efforts to reduce headcount have yet to show any results with EBITDA margin sliding further. Incremental contribution from the recently acquired stake in PT CAS failed to compensate for air cargo weakness, leading to significantly lower contributions from its associates (-16.8% YoY). The only bright spot is stable aviation statistics at Changi Airport with SATS gaining a larger slice of the air cargo market.

Another wave of earnings cuts to dampen sentiment
We cut our FY3/15-17E EPS by 8-9% to reflect the disappointing set of results and forecast a 4.5% earnings contraction in the year ahead. In our view, the spectre for consensus EPS downgrades will dampen sentiment on the stock.
While a DCF-based valuation reflects the strong cash generative nature of its business, we believe that the market will increasingly look to price SATS on earnings as it struggles to contain escalating costs in the near term. Hence, we downgrade our rating to SELL (from HOLD) and switch to a P/E-based valuation method (previously DCF) with a revised TP of SGD2.50 (from SGD3.30), based on 16x FY3/15E P/E. The stock offers an attractive FY3/15E yield of 4.8% at our revised TP.