Hot stock: SATS shares fall 5.8% after drop in Q1 earnings

SHARES of airport and food services provider SATS dropped 5.8 per cent in active trading on Friday, after it reported a 14.4 per cent drop in Q1 net profit on Thursday.

SATS shares were down 31 Singapore cents to S$5.01 around 3.40pm Friday, on a volume of 11.4 million.

Revenue for the first quarter was up 5.8 per cent from a year ago, but growth in gateway services and food solutions was partially offset by lower cargo volume, which fell 1.6 per cent due to "global trade uncertainties," SATS said.

Analysts at DBS and CGS-CIMB downgraded the counter to "hold" from "buy", while OCBC maintained its "hold" call.

DBS analysts Alfie Yeo and Andy Sim also reduced their target price to S$5.00 from S$5.44 in a research report on Friday.

Although headline revenue grew, it was largely due to the consolidation of Ground Team Red (GTR), they said, noting that without the S$22.5 million contribution from GTR, revenue would have been flat at S$442 million, or up just 0.6 per cent year-on-year.

"We expect lower margins and earnings growth going forward, led by a weak cargo outlook and consolidation of lower margin GTR operations," they added.

CGS-CIMB analyst Lim Siew Khee kept her target price unchanged at S$5.40, noting that while SATS' net profit of S$55 million was slightly below the bank's S$60 million forecast, its total revenue was broadly in line with expectations.

"The key variance came from higher depreciation with the adoption of SFRS 16 which resulted in recognition of right-of-use assets and higher 'other costs' due to maintenance for ground support equipment and vehicles, IT expenses, fuel costs and etc.," Ms Lim said.

She expects revenue from SATS' Japanese subsidiary to continue growing in 2020, benefitting from the Olympics.

Other factors that could impact SATS' business include macro weakness, which could put pressure on traveling demand. Ms Lim added: "Sizeable M&A (mergers and acquisitions) is a re-rating catalyst while a sudden plunge in aviation trend is a key risk."

OCBC analyst Chu Peng, who held to her "hold" call and fair value estimate of S$5.35, noted: "Despite the slowdown in the global economy, which is likely to continue to weigh on cargo volume, rising aviation passenger volumes in Asia and demand for safe and convenient food could bring growth opportunities to SATS."