SATS upgraded to Add by CGS-CIMB after earnings beat expectations

SATS Gateway Services bus at Changi AirportSATS Gateway Services bus at Changi Airport

CGS-CIMB upgraded SATS to Add from Hold after its fiscal third quarter results came in above its forecasts and overall operations performed better than expected.

It raised its target price to S$5.46 from S$5.06.

SATS reported on Wednesday its fiscal third quarter net profit increased 3.5 percent on-year to S$68.9 million on volume growth in its Food Solutions and Gateway Services segments. Revenue for the quarter ended 31 December increased 5.5 percent on-year to S$464.0 million, SATS said.

CGS-CIMB said in a note on Wednesday that the food solutions revenue, which was up 5 percent on-year, beat the brokerage’s target of 2 percent, with the TFK Japan operations delivering a steady performance.

“We expect stronger growth in TFK in 2020, riding on the Olympics fever which should see demand in more kitchen capacity at Tokyo airport.
SATS has started to increase its capacity in Haneda,” the brokerage said.

“SATS has done a good job in keeping its costs in check and we still see scope for improvement to deliver more positive jaw in its costs,” the note said, pointing to the staff costs-to-revenue ratio, which was at 46.9 percent in the fiscal third quarter, down from 49.6 percent in fiscal 2017.

“There could be more upside ahead with potential jobs credit handout by the Singapore government,” the brokerage said.

However, it cut its fiscal 2019-21 earnings per share forecasts by around 1 percent on the net effects of higher revenue growth, higher costs and lower growth from SATS’ associates.

CGS-CIMB noted the stock has fallen from its peak in 2018 and current valuations are “more decent” and offer potential upside. It estimated the stock was trading at 18 times calendar 2020 price-to-earnings, below its average of around 20 times.

The stock was down 0.2 percent at S$5.07 at 9:48 A.M. SGT.

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