BUY
Price S$2.58
Previous S$2.98
Target S$2.92
Results below expectations due to margin compression. SATS recorded 1QFY12 PATMI of S$42.5m (-4% YoY), coming in below our expectations. This included a full-quarter consolidation of TFK’s results. Stripping out TFK’s results, SATS’ PATMI declined 11.1%, dragged down by higher operating expenses, especially raw materials cost. We have raised our FY12 revenue estimates by 9.8% to S$2,061.9m on the back of improving business volumes in its aviation operations. However, we believe that inflationary pressures would continue to dampen earnings growth in the next few quarters, and have lowered our margin assumptions. Consequently, our earnings estimates are lowered by 1.4% to S$201.5m. Our revised DCF-based TP is S$2.92 (previously S$2.98), implying a 13% upside. Maintain BUY.
TFK expect to be profitable in FY13. Management highlighted that business volumes at TFK are improving each month and its operations are likely to be profitable in FY13. TFK recorded a loss of S$2.3m (excluding one-off item of S$10.1m) in 1QFY12.
UK business recorded weakest ever quarter. This was due to a seasonally weak quarter as well as structural changes undertaken by management. It is also refreshing its soups brand and carrying out marketing activities to seek out more opportunities for its fruits business. These added further pressure on its earnings. Its UK business is expected to improve in 3QFY12.
Lower margins expected. Coupled with weak UK performance, EBITDA margins declined 12.7% in 1QFY12 (4QFY11: 15.4%; 1QFY11: 16.6%). We expect margins to remain under pressure over the next few quarters.
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