Gateway services performed well on segmented revenues with a y-o-y growth of 5.1%, mirroring the positive traffic trends seen at Changi Airport.
However, food solutions dropped 2.9% as a non-aviation customer contracts were being restructured but more importantly, TFK Japan posted an 11% decline in revenue from customers Delta Airlines and Japan Airlines which had cut flight frequency.
Despite a number of incremental cost pressures with base effects of some government incentives wearing off, higher franchise fees to Changi Airport Group and some front-loading operating costs for the upcoming Changi Terminal 4, SATS’s 1Q18 delivered core underlying profit growth.
Maybank analyst Neel Sinha says, “These cost pressures were mitigated with lower raw material costs from leveraging its scale with suppliers and productivity improvements through automation which management state they will continue to invest in for the next few years.”
OCBC analyst Eugene Chua says, “Looking ahead, persistent decline in yields of airlines, along with lower government subsidy of staff costs, cessation of franchise fee rebates, and higher depreciation will continue to exert pressures on SATS’s margins.”
This is due to TFK facing headwinds in Tokyo airports. Chua believes that it is a result of overcapacity of caterers and volume may remain weak as long as its customers do not reinstate the flights they cut in 1QFY18.
Chua expects SATS’s GS revenue to grow as Changi Airport continues to record healthy growth across passengers and SATS’s strategy of diversifying out of Singapore through partnerships and/or M&A activities.
Meanwhile, SATS associates contributed 27% y-o-y growth which the management stated was quite broad based with markets in India and Indonesia doing particularly well.
“Given the number of new ventures in nascent operations or in gestation, we believe this is the wild card for earnings surprises or disappointments in FY18E-FY20E,” says Sinha.
Shares in SATS are trading 5 cents lower at $5.03 as of 11.14am.
