SATS Ltd. - How much more productivity gains can it squeeze out of current operations?

27/2/2014 - Maybank Research has maintained its BUY rating on SATS with a target price of S$3.47 and DBS Vickers Research suggests HOLDING the stock with a target price of S$3.25, following its recent earnings announcement.

The airport services provider says it will continue to face challenges due to ongoing pressure on airlines’ profitability and rising labour costs.

In the near-term, it expects modest growth in passenger traffic at Changi Airport and, at best, only marginal growth in air freight.

It will use automation and technology to counter rising manpower costs.

The company just announced earnings for Q3 FY14:

Revenue: -1.1% to S$465.5 mln
Operating margin: 9% vs 9.9%
Profit: -8.7% to S$42.9 mln
Net margin: 9.2% vs 10%
Cash flow from operations: S$34.6 mln vs S$3.7 mln

The fall in revenue was due to lower contributions from its subsidiary TFK Corp as the Japanese Yen fell against the Singapore Dollar.

It was also due 5.7% drop in unit meal volumes to 5.3 mln.

However, it was partially offset by 4.3% increase in gateway revenue to S$173.3 mln.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Can it improve its productivity in the near term?

SATS' operating expenses dipped at a slower pace versus its revenue.

This was mainly due to higher staff costs as it continued to be impacted by higher worker levies.

As a result, EBIT margin dipped by 0.9%-points to 9%.

In order to mitigate the rise in manpower costs, SATS is looking to raise productivity, through automation and the use of technology.

But it makes us wonder whether these initiatives will help SATS improve its profits in the near term.

Question

2. How much has been budgeted for investing in automation technology?

What specific technology is being considered?

(Total number of questions in the full story: 8)

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have not had a reply (which is why you are seeing this message).

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