Not vested. From Kim Eng:-
SATS FY2008 results (Gregory YAP, DID: 64321450)
Previous Day Closing price: $2.41
Recommendation: Buy (maintained)
Target price: $3.37 (maintained)
Below our expectations
Full year earnings of $194.9m (+9.3% YoY) are below our expectations of $209m, as associates did not perform as well as forecasted. Share of associate and JV profits fell 14% as higher costs were incurred by AAT in HK and BHS in Beijing with the opening of a second cargo terminal and Terminal 3, respectively.
Adjusted for after-tax exceptional items, such as a $15.5m gain from sale of ECC2 building, we estimate earnings were flat YoY (+1%).
Mixed performance among the segments
Revenue from Inflight Catering increased 5% to $430.9m (45% of total revenue). As unit meal volumes increased only 3.9%, this suggests SATS served higher value meals (eg lobster instead of prawns) to airlines using inflight meals in their competitive positioning.
Rates pressure and cessation of flights to Changi by five airlines and loss of three accounts caused Ground Handling revenue to slip 1% to $430.9m (45%).
Revenue from Security Services fell 5% to $47m (5%) following the cessation of a CAAS baggage screening contract.
Some growth expected, nothing fantastic
There are certainly no shortage of long term business drivers for SATS. It will definitely be a beneficiary of more Open Skies Agreements and STB’s target of attracting 17m annual visitors by 2015. In the most immediate term however, the opening of Changi Terminal 3 will be the clearest driver.
Further, management was optimistic associates’ will do better this year due to improvement plans and contributions from new JVs in India and Macau. However, higher operating costs (eg switch from counter rental from daily to hourly rate), a tight labour market and continued rates pressure from the third ground handling competitor could hold back growth.
We forecast a flattish curve in FY09 (+0.9% but 9.6% if ECC2 building sale gain is excluded from FY08 results).
But greater willingness to pay dividends makes up for it
Making up for the lack of growth however will be the commitment to raise dividend payout significantly in the absence of a capital investment need. For FY08, SATS declared a final ordinary dividend of 10 cents a share, up from 6 cents in FY07, marking a total payout of 77% vs 48.5% in FY07. Total dividend will therefore be 14 cents a share, just below FY07’s 15 cents which included a 5 cents special dividend.
Assuming a 75% payout again in FY09, forward yield is fairly attractive at 5.6%. Maintain BUY.