FY17 margin and profit was dragged down in 4Q17
FY17 EBIT margin of 13.3% was better than the 12.6% achieved in FY16. However, there was YoY weakness in 4Q17 EBIT margin of 10.8% from 11.9%. This was in contrast to the first three quarters of FY17, which experienced YoY higher margin that was driven by the deconsolidation of the lower-margin food distribution business to the SATS BRF joint-venture. 4Q17 operating cost was higher due to a few factors – higher wage pressure (due to service increment and lower government subsidies), higher company premises and utility expenses (due to non-renewal of rebates by Changi Airport Group) and higher other costs. Consequently, 4Q17 underlying PATMI was only 1.8% YoY higher. (9M17 underlying PATMI was 9.1% YoY higher.)
Associates received a $15 million boost in 4Q17
FY17 headline spike of 36% YoY in associates/JV profits was due to a $15 million negative goodwill recognised in 4Q17. SATS now holds a 25% stake in Evergreen Sky Catering Corporation (ESCC) after acquiring a further 10% stake. The stake in ESCC has now been reclassified from long-term investment to an associate; and the negative goodwill was a result of deemed increase in value of the original investment. Share of profit of associates/JV growth would have been flat at 1.0% YoY, in the absence of this item.
Maintain “Neutral” rating, with higher target price of S$5.08 (previous: S$4.73)
SATS Ltd (SATS) has been growing both organically and inorganically. Our price target gives an implied FY18e forward P/E multiple of 23.2x. We are upbeat on the long-term growth for SATS, but we find valuations unattractive at current level. Investors should look to accumulate on price weakness.
Our narrative for SATS Ltd
SATS will remain a regional food and aviation player, with organic revenue growth driven mainly by air traffic demand. Inorganic growth will mainly come from partnerships in businesses similar to existing ones, as well as adjacent business lines, resulting in investments in Associates & JVs. Capital reinvestment in technology to raise operating leverage and allow the company to scale up.
How our narrative connects to our valuation inputs
Discounted cash flow intrinsic valuation
We value SATS using a discounted free cash flow to firm (FCFF) model.