Event
SATS’ 1QFY Mar12 results were below expectations due to higherthan‐expected staff costs and stubbornly high food material costs. Excluding a $10.1m writeback for lower pension obligations for TFK, its underlying net profit slid by 16.5% YoY to $37m against reported net profit of $42.5m. We cut our FY Mar12‐13 forecasts by 9% and 5%, respectively, to reflect a 4% decline in underlying net profit this year. Maintain HOLD with a reduced target price of $2.46 (14x PER).
Our View
Topline momentum should remain strong this year due to growth in Changi flights and the inclusion of TFK’s revenue. The 8% YoY growth in unit services, a measure of airport apron workload, was the fastest in five quarters. The volume of passengers handled, meals uplifted and amount of cargo and mail processed remained stable. TFK is expected to account for 13.5% of FY Mar12 revenue.
Still, significant uncertainties loom, among them higher operating costs reflecting stiff manpower and material cost pressures. This and the impact from TFK’s operating loss caused EBITDA margin to fall by 4ppts in 1QFY Mar12 to 12.7%. The slowdown in the number of flights handled from the year‐end peak, while partly seasonal in nature, bears watching given renewed pressures on global air travel.
CEO Clement Woon’s departure also comes at an unfortunate time. While SFI’s integration is complete, recent acquisitions are still a work‐in‐progress. Although Mr Woon will stay on as advisor until year‐end and a 35‐year SATS veteran has been appointed interim CEO, some time will be needed to look for a replacement and it may be a year or so before the new CEO makes his or her impact felt.
Action & Recommendation
We lower our target price from $2.70 to $2.46 on the back of lower forecasts, but maintain our HOLD call on supportive yield of 4‐5%.
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