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BUY (Upgraded)

COMPANY RESULTS

SATS (SATS SP) 4QFY15: SATS Impresses With Pricing Power And Long-term Plans We are impressed by the manner in which SATS has delivered earnings growth, even amid tough operating conditions at Changi. Going forward, SATS plans to grow its non-inflight catering food solutions business in the region and this is likely to bear fruit as it is teaming up with a business partner and global leader. Upgrade to BUY. Target price: S$4.00. 4QFY15 RESULTS Year to 31 Mar (S$m) Revenue Gateway services Food Solutions Op Expenditure Op Profit Non operating income PBT Net Profit

4QFY15 425.1 173.0 250.8 380.4 44.7 13.2 57.9 51.6

yoy % (2.2) 3.5 (5.8) (3.2) 7.2 41.9 13.5 21.1

FY15F 1,753.2 697.0 1,051.4 1,575.2 178.0 33.6 224.8 195.7

yoy % (1.9) 2.8 (4.7) (2.5) 4.1 (4.5) 4.3 8.5

Remarks(4QFY15) Higher ASP at unit services 18% decline in TFK rev

32% rise in associates income

Source: SATS, UOB Kay Hian

Share Price Target Price Upside (Previous TP

S$3.21 S$4.00 +24.7% S$3.11)

COMPANY DESCRIPTION Airline gateway services and food solutions provider. SATS also has a 50.7% stake in Japan's TFK Corp, an inflight meal caterer based in Narita.

STOCK DATA GICS sector Bloomberg ticker: Shares issued (m): Market cap (S$ m): Market cap (US$m): 3-mth avg daily t'over (US$m):

Industrials SATS SP 1,104.5 3,545.4 2,687.4 4.0

WHAT’S NEW  4Q net profit was 22% higher than consensus and 18% higher than ours. Operating profit for 4QFY15 at S$45m, was just S$1m higher than our estimates, but stronger associate income (+34%) and a $2.6m minority interest (likely losses at 51%-owned TFK) were the primary reasons why SATS beat our expectations. SATS also raised its dividend payout from 8 S cents to 9 S cents vs our expectation of 10 S cents. Overall, earnings would have been even better were it not for losses at Japanese unit, TFK.

Price Performance (%)

Temasek Hldgs

43.2

 Positive operating leverage from gateway services. Higher ASP (+11.4% yoy) offset the reduction in unit services (pax, cargo and flights handled at Changi) and led to a 3.5% increase in top-line. The improvement in ASP was due to better pricing and product mix. This, coupled with cost saving initiatives and a reduction in pax handled volume, led to improved profitability. Margins for the gateway services more than doubled from a year ago.

FY16 NAV/Share (S$)

1.38

FY16 Net Cash/Share (S$)

0.33

52-week high/low

1mth

S$ 3.23/S$ 2.85

3mth

6mth

1yr

YTD

5.6

8.1

0.0

5.2

1.6

Major Shareholders

%

PRICE CHART (lcy)

SATS LTD

SATS LTD/FSSTI INDEX

(%)

110

3.40

3.20 100 3.00

KEY FINANCIALS Year to 31 Mar (S$m) Net turnover EBITDA Operating profit Net profit (rep./act.) Net profit (adj.) EPS (S$ cents) PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt/(cash) to equity (%) Interest cover (x) ROE (%) Consensus net profit UOBKH/Consensus (x)

90

2014 1,787 262 171 180 180 16.1 19.9 2.5 12.7 4.0 10.1 (16.1) 145.4 12.3 -

2015 1,753 246 178 196 196 17.9 17.9 2.4 13.5 4.4 11.2 (21.2) n.a. 13.7 -

2016F 1,801 297 200 216 216 19.8 16.2 2.3 11.2 4.5 12.0 (23.7) 1,160.1 14.7 196 1.10

2017F 1,879 320 227 239 239 22.0 14.6 2.2 10.4 4.8 12.7 (26.0) n.a. 15.6 210 1.14

2018F 1,985 343 266 278 278 25.5 12.6 2.1 9.7 5.0 14.0 (28.5) n.a. 17.1 -

2.80

2.60

80

8 6

Volume (m)

4 2 0

May 14

Jul 14

Sep 14

Nov 14

Jan 15

Mar 15

May 15

Source: Bloomberg

ANALYST K Ajith +65 6590 6627 [email protected]

Source: SATS, Bloomberg, UOB Kay Hian

Refer to last page for important disclosures.

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 At associate level, 4QFY15’s growth was driven by food solutions, presumably Indian JV, AISATS. The commencement of the Shanghai Disneyland in 2016 could potentially lead to incremental associate income as SATS, through its Chinese JV caters to both China Southern Airlines and China Eastern Airlines. The JV operates in Beijing, Tianjin, Shenyang and Jilin. STOCK IMPACT  SATS is optimistic of its meat distribution and processing JV with BRF, which is the sixth largest food manufacturer and distributor in the world. CEO Alex Hungate outlined his strategy whereby the JV could lead to incremental margins by tapping on to BRF’s processing and manufacturing and distribution capabilities, while utilising SATS existing food processing facility. Prior to the JV, the food processing segment was making minimal profits. The JV will initially extend SATS’ reach in processed food distribution, before expanding further into branded meat distribution. BRF, which is listed in Brazil, had a 11.9% operating margin as at end-14. We reckon that SATS’ non-inflight catering food solutions business would at best have low single-digit margins. Thus we believe the JV holds scope for margin improvement over the next three years.

OPERATING STATISTICS 4QFY15

yoy % chg

FY15

Yoy % chg

26.3

-7.4

110

-3.4

29.4

-12.4

126

-6.0

380.0

1.8

1570

4.6

Unit Services Handled ('000) Flights Handled ('000) Cargo Processed ('000 tonnes) PaX Handled (m) Unit Meals (m) Gross Meals(m) Source: SATS

9.7

-8.2

42

-4.3

5.1

1.6

21

1.2

6.5

1.6

26

1.3

OPERATING MARGIN (%) 13

12.0

12 10.7 11 9.9 10

11.3 10.5

11.3

11.1

9.9

10.3 9.4

9.6

 Near-term drivers: Rebates at Changi and restructuring at TFK. Effective 1 May 15, Changi Airport Group is offering a 20% rebate on ground handling and inflight catering. SATS indicated that part of the rebates could be spent on improving efficiency. We have imputed a 5% cost savings ($3m) from the reduction in licensing fee for FY16. In 4QFY15, SATS incurred a restructuring cost at TFK, but did not disclose the cost. TFK is also increasingly utilising its surplus kitchen capacity to provide institutional catering. This could stem losses at TFK and thus improve margins.

Source: SATS, UOB Kay Hian

EARNINGS REVISION/RISK

SEGMENTAL OPERATING MARGIN

 We raise our FY16 and FY17 net profit estimates by 8.5% and 13.0% respectively.

(%) 15

SHARE PRICE CATALYST

9.1

9.6

7 6 5 4 2QFY12

10

2QFY13

2QFY14

13.6 11.2 9.4

2QFY15

12.9

10.8

12.1

7.4 5.7

5

3.2

2.0

0 FY11

FY12

Food solutions

FY13

FY14

FY15

Gateway services

Source: SATS, UOB Kay Hian

 Higher-than-expected savings from licensing fees.

VALUATION

SEGMENTAL REVENUE Year to 30 Jun By Business (S$m) Gateway Services Food Solutions Corporate Total By Industry (S$m) Aviation Non-Aviation Corporate Total By Geographical Location (S$m) Singapore Japan Others Total

9.0

8

VALUATION/RECOMMENDATION  Upgrade to BUY. We are optimistic of SATS’ plans to tie up with major food solutions providers to turn around its food distribution business. We also expect margins at both food solutions and gateway services to improve further as SATS has already demonstrated operating efficiency in an environment of deteriorating volume. We continue to value SATS on a DDM basis but we now raise our fair value from S$3.11 to S$4.00.

9.0

9

4QFY15

yoy % chg

173.0 250.9 1.2 425.1

3.5 -5.8 0.0 -2.2

336.9 87.1 1.1 425.1

-2.7 0.1 -8.3 -2.2

352.7 52.4 28.6 450.7

1.0 -17.9 33.0 3.7

Risk-free rate

3.0%

Required rate

6.9%

Sustainable ROE

13.7%

Final payout ratio

92.0%

Terminal growth

1.1%

DDM Valuation (S$) Source: UOB Kay Hian

4.01

Source: SATS

Refer to last page for important disclosures.

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PROFIT & LOSS Year to 31 Mar (S$m) Net turnover EBITDA Deprec. & amort.

Friday, 15 May 2015

BALANCE SHEET 2015

2016F

2017F

2018F

1,753.2

1,801.2

1,879.0

1,984.8

246.2

297.3

319.9

343.3

Year to 31 Mar (S$m)

2015

2016F

2017F

2018F

Fixed assets

551.7

559.6

572.4

589.4

Other LT assets

675.3

642.1

645.1

645.7 576.6

68.2

97.4

92.9

77.2

Cash/ST investment

410.9

458.6

510.0

178.0

199.9

227.0

266.1

Other current assets

381.8

404.1

418.2

438.5

Total other non-operating income

(1.7)

3.3

0.7

1.7

2,019.7

2,064.4

2,145.8

2,250.2

Associate contributions

48.1

50.4

56.6

61.3

0.4

(0.3)

0.0

0.4

EBIT

Net interest income/(expense)

Total assets ST debt Other current liabilities

15.6

13.6

11.6

10.6

330.2

309.7

321.6

329.3 89.8

Pre-tax profit

224.8

253.3

284.3

329.5

LT debt

89.7

89.8

89.8

Tax

(34.1)

(38.5)

(43.2)

(50.1)

Other LT liabilities

66.6

77.8

73.3

72.3

Minorities

5.0

1.0

(1.8)

(1.8)

1,441.1

1,498.0

1,572.2

1,669.1

Net profit

195.7

215.8

239.3

277.6

Minority interest

Net profit (adj.)

195.7

215.8

239.3

277.6

Total liabilities & equity

Year to 31 Mar (S$m)

2015

2016F

2017F

2018F

Year to 31 Mar (%)

Operating

236.4

188.9

244.4

267.6

Profitability

Pre-tax profit

224.8

253.3

284.3

329.5

Tax

(35.3)

(40.3)

(29.3)

(38.5)

68.2

108.6

92.9

77.2

(48.1)

(41.2)

(52.7)

(47.2)

21.3

(67.9)

(11.3)

35.0

Non-cash items

0.0

0.0

0.0

0.0

Other operating cashflows

5.5

(23.6)

(39.5)

(88.5)

Growth

CASH FLOW

Deprec. & amort. Associates Working capital changes

Investing Capex (maintenance) Investments Proceeds from sale of assets

EBITDA margin

14.0

16.5

17.0

17.3

Pre-tax margin

12.8

14.1

15.1

16.6

Net margin

11.2

12.0

12.7

14.0

ROA

9.7

10.6

11.4

12.6

ROE

13.7

14.7

15.6

17.1

5.6

Turnover

(1.9)

2.7

4.3

(83.0)

EBITDA

(6.0)

20.7

7.6

7.3

0.0

(1.0)

(1.0)

0.0

Pre-tax profit

4.3

12.7

12.2

15.9

Net profit

8.5

10.3

10.9

16.0

Net profit (adj.)

8.5

10.3

10.9

16.0

11.3

10.5

11.0

16.1

Debt to total capital

6.5

6.2

5.8

5.4

Debt to equity

7.3

6.9

6.5

6.0

(21.2)

(23.7)

(26.0)

(28.5)

n.a.

1,160.1

n.a.

n.a.

Financing

(199.6)

(161.4)

(163.6)

(172.4)

Dividend payments

(145.6)

(153.7)

(158.9)

(169.7)

(54.6)

(5.2)

(2.2)

(1.2)

1.1

0.0

0.0

0.0

(1.6)

(2.5)

(2.5)

(1.5)

Ending cash & cash equivalent

2018F

(28.7)

0.0

Changes due to forex impact

2017F

(77.0)

54.3

Beginning cash & cash equivalent

2016F

(29.4)

0.0

Net cash inflow (outflow)

2015

1.4

48.6

Others/interest paid

79.1 2,250.2

(70.0) 0.0

Loan repayment

77.3 2,145.8

58.1

72.4

Proceeds from borrowings

75.5 2,064.4

(61.3) 0.5

Issue of shares

76.5 2,019.7

KEY METRICS

118.9

Others

Shareholders' equity

1.1

0.0

0.0

0.0

94.9

28.9

51.4

66.5

339.6

429.7

458.6

510.0

(4.8)

0.0

0.0

0.0

429.7

458.6

510.0

576.6

Refer to last page for important disclosures.

EPS Leverage

Net debt/(cash) to equity Interest cover (x)

313

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UOBKH is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution by UOBKH (whether directly or through its US registered broker dealer affiliate named below) to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). All US persons that

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