Share Price S$3.18
Target Price S$3.08
3QFY14: Below Expectations As Food Solutions Revenue Takes A Hit
Opex remained relatively flat, despite a 1.1% decline in revenue. Operating margin consequently declined 0.9ppt to 9.0%. We lower our FY14 and FY15 net profit estimates by 8.4% and 6.4% respectively. Maintain HOLD. Target price: S$3.08. Entry price: S$2.94.
• 3QFY14 earnings below expectation. 3QFY14 net profit was 11% lower than our estimates, while 9MFY14 net profit amounted to 66% of consensus estimate and 68% of ours’. Operating costs remained flat yoy as a 3.6% increase in staff costs was offset by lower depreciation. Raw material costs as a proportion to food solutions revenue rose 1ppt. Operating margin fell 0.9ppt yoy to 9.0% while EBITDA margin fell 1.9ppt to 13.1% in 3QFY14.
• Food solutions impacted by lower TFK revenue and loss of income from Qantas. TFK’s revenue fell 18% yoy due mainly to a weaker yen. In flight catering revenue fell 4.6% due mainly to the loss of income from Qantas. This was however offset by a 9% yoy growth in non aviation food services. Management indicated that excluding the yen depreciation, yen revenue would have grown yoy and that Japanese subsidiary TFK was profitable.
• Strong contribution from associates/JVs. Associates/JV income grew 7.4% yoy and accounted for 24% of PBT compared to 21% last year. SATS attributed the better associate/JV results to better performance in China and Indonesia. 9MFY14 dividend payout from associates amounted to 73% compared to 72% in previous period.
• Free cash flow rose 4% yoy. Capex more than doubled during 3QFY14 but lower working capital changes led to marginal improvement in FCF.
• Expect a downward re-rating. We expect consensus downgrades to FY14/15 numbers given that 9MFY14 net profit only amounted to 66% of consensus estimate. 4QFY has historically been a seasonally weaker quarter compared to 3QFY. Dividend estimates are also likely to be lowered. We have lowered our 4QFY14 earnings forecasts by 6.6% given the weak revenue growth.
• Bleak outlook but FY15 should see maiden contributions from Singapore Sports Hub and the Singapore Cruise Centre. SATS continues to warn on the challenging operating environment. Specifically, SATS cited pressure on airlines’ profitability and rising labour costs as key challenges. Though we are positive on management’s move towards using automation and technology to counter rising labour costs, these measures may not take effect in the near term.
For FY15, we expect maiden contribution from the commencement of the Singapore Sports Hub as well as revenue from the Singapore Cruise Centre. For the former, we have assumed S$12.0m in revenue contribution. SATS has guided for steady state revenue of S$50.0m from the Sports Hub.
• We lower our FY14 and FY15 net profit forecasts by 8.4% and 6.4% respectively as we reduce our food solutions revenue estimates. We also lower our dividend estimates by 1.1 cents to 15 cents for FY14, and by 0.9 cents to 15.8 cents for FY15.
• Maintain HOLD with a lower target price of S$3.08. We continue to value SATS on a DDM basis but lowered our fair value from S$3.24 to S$3.08, following a cut in our dividend estimates. At our fair value, the stock offers a dividend yield of 5.1%. Suggested entry price is S$2.94, or a 10% net return.
SHARE PRICE CATALYST
• Lower staff costs.
• New JVs and/or M&A.
Publish date: 12/02/14