SATS

SATS: reported a fairly weak set of 2QFYMar14 results, with net profit of $48.7m (-3% y/y, +5% q/q), on lackluster revenue and margins. The operations continued to reflect weak TFK contributions and the impact of the Qantas flight withdrawals. The stronger 2Q travel season in Japan provided no relief, with TFK revenues falling 21% y/y as a weaker yen aggravated an underlying ~5% reduction in meals produced on strained Sino-Japanese relations. Mgt indicated recent traffic trends remained weak, suggesting 3Q14 may continue to reflect sluggish contributions from TFK. Spore inflight catering revenues slipped 3% y/y. Unit meals produced dropped 4% y/y, as the Qantas flight withdrawals impacted. Mgt was hopeful inflight catering revenues would recover in the coming quarters but indicated 3QFY14 could still remain challenging. Operating margins fell to 10.3%, with mgt pointing to staff costs as a key pressure point but emphasized sustained efforts to raise productivity. The group proposed 5ct interim dividend unchg from last year, representing a 60% payout. Maybank-KE maintains Buy with TP $4, believes SATS is well positioned to benefit from Changi Airport’s ongoing expansion for growth. Says investors should look beyond the current poor performance as SATS highly cash generative business provides room for higher payout as it optimizes its capital structure. The acquisition of Spore Cruise Centre will also strategically position SATS as a direct proxy to the tourism growth story in Spore. Deutsche maintains Buy with TP $3.54, notes the robust balance sheet supports its positive stance. OCBC however maintains Hold with TP $3.35, sees limited upside as on-going tapering expectations may have a negative impact on dividend yielding counters like SATS.