+ Higher Food Solutions (FS) revenue driven by higher meal volumes across the Group. TFK Corp. (inflight kitchen subsidiary based in Tokyo) experienced a 3.1% YoY increase in revenue. However, the higher meal volumes was partially offset by lower pricing, as airline margins are still constrained by strong competition in Asia. Cost of raw ingredients is also expected to continue to increase. Raw materials cost was 10% higher YoY, despite FS revenue increasing by 2.7% YoY.
+ Higher Gateway Services (GS) revenue driven by both Aviation and Non-Aviation; and was the key driver to Group EBIT margin improvement. There was an increase in air cargo tonnage and flights handled. In addition, the cruise terminal at Marina Bay Cruise Centre Singapore (MBCCS) benefitted from higher ship calls and increased passengers handled. Air cargo is a high operating leverage business which benefited from the higher volumes (better flow through to bottom line), while the cruise centre turned around to profit.
+ 9% YoY higher Non-Aviation revenue to S$60.2 mn (13.7% of Group revenue). This was due to revenue growth from the Kunshan central kitchen and MBCCS; both of which have turned profitable (refer to further details overleaf).
– Lower associates/JV contribution. This was due to a soft quarter in Indonesia for PT CAS and PT JAS, but partially mitigated by existing and new associates/JVs.
The outlook is positive. Passenger volumes in Asia is expected to grow, given the backlog of aircraft on order and airport expansions across the region. MBCCS has turned around and ship calls are expected to be sustained. The Kunshan and Langfang central kitchens are poised to benefit from urbanisation and demand for safe, high-quality food. SATS has been investing in technology to boost productivity in anticipation of higher volumes, with staff cost (variable cost) progressively replaced by depreciation (fixed cost). Impact from a trade war that materialises is limited for now, but would be the key risk to earnings.
Maintain Accumulate; unchanged target price of $5.58
We like the stock for its regional expansion story and growth initiatives. Our target price gives an implied FY19e forward P/E multiple of 24.7 times.
Here are the key takeaways from Management sharing of updates.
Mutual agreement to terminate Memorandum of Agreement for inflight catering JV with Turkish Airlines
Marina Bay Cruise Centre Singapore (operator JV with Creuers del Port de Barcelona)
Kunshan central kitchen on outskirt of Shanghai, China (JV with Yihai Kerry)
Langfang central kitchen on outskirt of Beijing, China (recently announced JV with WI Kitchen, a subsidiary of Wilmar)
Impact from possible trade war