May 19, 2017

SATS may deliver steady 4QFY17 revenue of S$440m-450m and net profit of S$60m- 63m, potentially supported by strength in gateway, with higher yoy cargo tonnage as trade volumes rose in East Asia, Europe and the Americas.

Cargo handled in Changi grew 6.2% yoy, boosted by +10% yoy in Mar. SATS’s ground handling business remains firm as flights and passengers handled in Changi airport grew 1.9% and 4.6% yoy in 1QCY17.

SATS has re-rated in the last two years, due to inclusion in the FSSTI and double-digit earnings growth, in our view. FY16 deconsolidation of food distribution business and licensing fee rebate led to 13% yoy earnings growth, although its revenue fell 3%. 9M17’s 13% yoy earnings growth was due to higher sales from Delta’s contract in Japan, cargo strength and some raw material cost savings mainly on weaker currencies (Yen, Real). EBIT margin grew from 12.6% in FY16 to 14.2% in 9MFY17.

Overseas associates’ growth is key to SATS’ growth given the limited single-digit growth that can be achieved in Singapore. We expect 4QFY17 associates earnings of S$14m (+14% qoq, 24% yoy) if ASEAN’s 9MFY17 airfreight momentum is maintained.

For FY18-19F, we are factoring in c.6% p.a. revenue growth on sustainable Changi volume increase.

Our EBIT margins for FY18-19F are lifted to 14.4% and 14.6%, respectively (prev. 13.7% and 14.4%). Our EPS is tweaked higher by 2-4% for FY18-19F. Even after these, our projected earnings growth is only 7-8%. The stock is trading at stretched valuations of 23x FY18 P/E, leaving little room for disappointment. We see opportunity to trim some profits post results and dividend announcement. Re-rating catalysts could come from stronger-than-expected cost cutting measures or sizeable M&As. Maintain HOLD, TP S$5.17. –CIMB

SATS closed at: S$5.290