Fair Value - S$2.43
Net earnings fell 25% in 3QFY12.
SATS Ltd’s (SATS) reported 3QFY12 revenue of S$442m and PATMI of S$38m, representing minimal growth in revenue and a fall of 25% in PATMI from a year ago. However, if we remove the contribution of the divested Daniels Group from its 3QFY11 financials, SATS’ 3QFY12 revenue, driven by new contribution from its Japanese subsidiary TFK, is up 32% YoY. The significant fall in PATMI can be attributed to
1) an overall increase in cost,
2) lower profit contribution from overseas associates, and
3) a swing from an operating profit to a disposal loss in the discontinued Daniels operations.
Strong organic growth.
By our estimation, SATS in 3QFY12 recorded strong organic revenue growth of 11% and 12% YoY in its Gateway services and In-flight catering segments respectively while the revenue of its non-aviation food services segment was flat YoY. Another encouraging sign is the continued recovery of its Japanese subsidiary TFK, which recorded another profitable quarter.
Increased cost and less profitable associates.
Management attributed the overall increase in cost in 3QFY12 primarily to an increase in staff cost, utilities and cost of raw materials. This could be the result of a higher cost base, signalling margin pressures SATS is currently facing. Furthermore, SATS’ profit contribution from overseas associates declined for a second consecutive quarter. Management said the fall was caused by lower cargo volumes handled by its associates in Hong Kong.
Downgrade to HOLD but retain fair value.
We retain our fair value estimate of SATS at S$2.43 per share, by pegging our earnings forecast over the next four quarters against a P/E multiple of 15x. However, after a strong rebound of its share price since the turn of the year, we downgrade SATS to HOLD, based on valuation grounds.
PhilipCap - Target Price S$2.76
Major Shareholders
1. Temasek Holdings Pte Ltd 43.3%
2. Capital Research Global Investor 2.6%
3. First Eagle Investment Mgmt LLC 1.5%
Company Background
With over 60 years of operating experience and a growing regional presence, SATS is Singapore's leading provider of Gateway Services and Food Solutions. Its comprehensive scope of gateway services encompasses airfreight handling, passenger services, ramp handling, baggage handling, aviation security and aircraft interior and exterior cleaning, while its food solutions business comprises inflight catering, food distribution and logistics, institutional catering as well as airline linen laundry. Today, SATS is present in 35 airports in 10 countries. It has also extended its non-aviation food business beyond Singapore to China and Australia. SATS has been listed on the Singapore Exchange since May 2000.
52 Weeks Range: 2.040 - 2.734
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