SATS earnings expected to remain lackluster

Good news is prospects of deployment of cash or a higher than expected payout may support share price.

DBS Group Research noted:

3Q12 net profit declined by 25% y-o-y to S$38.2m on flat revenue as expenses rose by a faster clip to S$398.5m (+3% y-o-y). As a result, EBIT margin fell by 2ppt to 9.9% from 11.9% in 3Q11 (2Q12: 10.6%). Contributions from JVs was 16% lower, largely arising from lower cargo volumes. 3Q12 also booked a loss of S$5.5m on discontinued operations. Excluding this, underlying profit would have fallen by a smaller 9% y-o-y to S$43.7m.

We expect 4Q12 earnings to remain lackluster due to macro headwinds, coupled with a seasonally weaker quarter. We trimmed FY12/13F earnings by 12%/ 7% arising from lower topline growth (FY12/13F revenues cut by 3%/6%). We have factored in a smaller contribution from its JVs/ associates due to the weaker economic outlook, as well as a higher effective tax rate for the group.

Cash position as at end-3Q12 stood at S$423m (c.38 Scts/share), contributed by the disposal of Daniel’s UK. Management indicated that it is on the lookout for opportunities to deploy its cash for inorganic growth, and does not rule out paying special dividends to shareholders if there are no immediate uses for it. We believe this possibility could provide support to share price, despite its soft earnings outlook in the near term.

Our DCF/PE based TP is trimmed slightly to S$2.48 as a result of our lower earnings offset partially from rolling our valuations forward to average of FY12F/13F. We are concerned about visibility of near term earnings, but prospects of deployment of cash or a higher than expected payout may support share price.