SATS

SATS (S$3.87): Solid 2QFY16 earnings and margin expansion on cost efficiencies

SATS’s 2QFY16 results were on track as net profit soared 26.8% y/y to $59.7m. This lifted 1H15 earnings to $109.3m, which represents 51% of full year consensus estimate.

However, revenue dipped 4.4% to $422.7m, mainly due to the divestment of Urangan Fisheries, a weaker JPY, and the transfer of its food distribution business to its new JV, SATS BRF Food in Jun ’15.

Operating margin expanded to 14% (+4.4ppt) as it shaved its operating costs by 9.1%, largely from raw materials (-19.2%), fuel, distribution, sales and marketing. The group’s premise & utilities expenses (-11.5%), as well as licensing fees (-16%) were also trimmed.

Bottom line was further bolstered by higher contribution from associates and JVs (+10.2%).

Interim DPS of 5¢ was maintained.

Looking ahead, management is confident about the long-term prospects for the aviation and food solution industry in Asia, evident from its offer to acquire an effective 34.3% stake in Malaysian-based Brahim’s inflight catering business.

Maybank-KE sees the group to benefitting from rising travel demand and air traffic, potentially stimulated by cheaper air ticket prices amid persistently low oil prices.

The house also expects TFK Corp., the Japanese inflight catering unit, to turn around in 2H16 on market consolidation and the addition of Delta Air as a new customer starting from Oct ’15.

As such, it has bumped up its FY16-18 earnings estimates by 1.5-2.6%, and revised its TP upwards to $3.82 from $3.21, but maintains a Hold rating given limited upside to the current share price.

SATS is currently trading at 18.8x FY16e P/E and offers a dividend yield of 3.8%.

Latest broker ratings:
UOB Kay Hian upgrades to Buy from Hold, raises TP to $4.50 from $3.90
Maybank-KE maintains Hold, raises TP to $3.82 from $3.21
OCBC maintains Hold with TP of $3.78