SINGAPORE (May 31): UOB Kay Hian, DBS Vickers Securities and Maybank Kim Eng are maintaining their “buy” calls on SATS post the gateway services and food solutions provider’s release of its 4Q18 results, which declined from a year ago due to lower associate and joint venture (JV) profits as a result of a one-off accounting treatment, according to the management.
Both UOB and DBS have lowered their target prices on the stock to $5.70 and $5.64, respectively, from $5.80 and $5.67 previously -- while Maybank has adjusted its target price upward to $6.15 from $6.10 on expectations of new ventures to drive the group's growth over the next three to five years.
In a Thursday report, UOB analyst K Ajith highlights the improvement of returns on JVs and associates as a key challenge for SATS going forward, especially since the group is intending to invest a substantial amount in these ventures.
“We are also not confident that SATS’ gateway services JV with AirAsia will boost ROE, given that operating margins for Malaysian ground services handlers amounted to just 4.6% in 2016. In comparison, SATS generated an operating margin of 10.1% in FY18 for the gateway services division,” says Ajith.
Despite the group’s expectations of pressure on local inflight catering to continue, the analyst believes SATS could still “wring out operating leverage” from incremental gateway services. He also remains positive on management expectations of continued pax and cargo traffic growth.
In all, UOB raised FY19 net profit estimates by 2.9% on management guidance that it would not recognise any losses post its investment in Beijing Ground Services.
It continues to value the counter with a weighted average cost of capital (WACC) of 6.3%; long-term return on invested capital (ROIC) of 15.4% compared to 15.7% previously; and a growth rate of 3%. This means that at its fair value, the stock will trade at 24.3 times FY19F P/E and an ex-cash P/E of 23 times.
Likewise, DBS analyst Alfie Yeo says he remains positive on SATS’s outlook over the long-term as core earnings remain intact – with growth drivers stemming from growth at Changi Terminal 4 and better margins due to automation and improved staff productivity over the next few years, among others.
His earnings growth projections continue to be based on the realisation of better productivity and operating cost leverage going forward.
In particular, he believes the potential development to step up a flight kitchen in Turkey and Changi Terminal 5 would be a positive key driver of the group’s share price over the longer-term.
“Negotiations with Turkish Airlines are ongoing and we expect return rates to be favourable if SATS eventually goes ahead with the development,” says Yeo.
Maybank is among the most bullish on SATS's growth outlook for FY19-FY21E, as its analyst Neel Sinha expects a number of the group's ventures in new areas and markets to begin contributing to the group's earnings in the near-term, particularly Turkish Airlines and AirAsia, along with its other ventures in Saudi Arabia, Mumbai and China.
The research house has revised its FY19-20E EBIT projections for associates & JVs upwards by 2.5% each to result in $71.2 million and $74.3 million, respectively, from its previous forecasts of $69.5 million and $72.6 million.
"SATS has a number of relatively new ventures, many of which are in investment-gestation stages that we expect will start contributing to profit growth over the coming two years. In addition, there are existing operations that should see tailwinds of organic growth from various market developments," says Sinha, with the recent opening of Changi Airport Terminal 4 being one such source of organic growth potential in the group's home market.
Phillip Capital, on the other hand, has upgraded its call on the counter to “accumulate” from “neutral”, and raised its target price to $5.58 from $5.33 previously to imply a FY19E forward P/E multiple of 26.4 times.
Its analyst Richard Leow says he likes the stock for its regional expansion story and pipeline of growth initiatives, and expects associates and JVs to continue contributing an increasing proportion to the group’s earnings going forward.
“With investments in new ventures and partnerships, we expect inorganic growth at the associate/JV level… The group continues to grow its footprint across Asia and is leveraging on technology to improve productivity as volumes increase,” notes Leow.
On a separate note, OCBC Investment Research maintains its “hold” call on SATS with an unchanged fair value of $5.50 after rolling forward valuations, even as FY18 core PATMI fell below expectations.
The research house’s lead analyst Eugene Chua says that while he is positive on the group’s long-term outlook given its significant Asia exposure, he recommends that investors re-engage only when its share price approaches $5.15 and lower.
“Working with a high operating leverage, gaining scale is crucial and SATS’s strategy ahead is to build up its network and connectivity with a focus in Asia,” observes Chua.
“Beyond these, a potential catalyst would be the potential partnership with Turkish Airlines to provide in-flight catering services at Istanbul New Airport… We expect SATS to continue to invest to expand its network of 60 airports through more partnerships going forward, with management noting the use of leverage over time but will manage net gearing below 30%,” he adds.
As at 11.16am, shares in SATS are trading 2 cents lower at $5.26 or 3.5 times FY19F book according to UOB estimates.
