1Q12 results decent although higher costs bite. SATS Ltd (SATS) reported a 22.1% YoY (-7.6% QoQ) growth in its revenue on the back of higher revenue contributions from both its gateway services and food solutions segments; but this was offset by higher operating expenditure (+27.9% YoY; -4.1% QoQ) due to increased staff wages and rising food inflation experienced over the past year. With regards to the consolidation of TFK, it added a one-time exceptional S$10.1m gain to SATS' profit before tax after the migration to a new staff retirement benefit plan produced a reduction in its obligations under the plan. Excluding this one-off item, operating profit actually fell 25.7% YoY to S$30.6m from S$41.2m previously. Overall net profit came in at S$42.5m (-4.1% YoY) after a 9.5% YoY increase in income from associated and JV companies failed to negate the higher costs experienced over the year.
Challenging times ahead but SATS is poised to address them. Given the continued uncertainty surrounding global economic conditions, SATS' outlook remains similar to its previous quarter. Sustained levels of higher food prices and increases in foreign worker levies are expected to maintain its squeeze on margins while SATS could also experience lower unit services and flight handing volumes should the aviation sector weaken as a result of a potential economic downturn and/or further political upheavals and social unrests affecting travel arrangements. However, as shown by SATS' QoQ reduction in operating expenditure, we feel that its cost management initiatives are paying off, and fully expect SATS to continue managing rising food and labour costs effectively. Currently on the food cost front, SATS is optimizing the timing of its purchases and leveraging off its extensive network to mitigate elevated prices. In addition, SATS's pass-through cost structures should adequately relieve costs in the medium term. On the labour front, it has implemented initiatives to maximize its existing manpower pool via efficient deployment and increased automation of processes.
On track for decent growth; maintain BUY. With the issues currently faced by the US and Eurozone countries, we expect SATS' growth in the near to medium term to remain on track and be driven by increased travel to and from other Asian countries. Tourism arrivals to Singapore are anticipated to hit 13m this year as compared to 11.6m in 2010, and the expansion of flights offered by low cost carriers should provide the required impetus to support this trend and benefit SATS. Given the as-expected softer 1Q12 performance and stable cost figures, we are leaving our FY12 estimates unchanged. Maintain BUY on SATS with an unchanged fair value estimate of S$3.02.
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