SINGAPORE (May 22): UOB Kay Hian is keeping SATS at “hold” with a higher target price of $5.05 from $4.60 previously after the airline gateway services and food solutions provider reported $67 million in earnings for the fourth quarter ended March 31.

(See also: SATS reports 31% rise in 4Q earnings to $67 mil)

Last week, UOB analysts K Ajith and Sophie Leong had highlighted the possibility of higher-than-expected 4Q earnings for the group after potentially factoring in $12 million of gains from the group’s disposal of its stakes in Air Airfreight Terminal (AAT) and SATS HK.

(See also: Disposal gains could lead to higher-than-expected 4Q earnings for SATS)

In an updated report on Monday, Ajith and Leong share that the group’s 4Q results instead came in slightly below expectations on higher costs reported over the quarter – as $15 million in negative goodwill was registered due to the reclassification of the group’s 25%-owned Every Green Sky Catering from long-term investment to an associate.

Excluding the negative goodwill, SATS’ earnings would have risen 1.7% on-year.

The group’s management has also guided for lower operating margins in FY18 due to higher licensing fees, wage cost pressures due to a reduction in government subsidies, as well as airline price pressures.  

“While valuations remain rich, we believe that the street will continue to appreciate SATS’ strong cash flow and ability to generate returns on capital. Thus we expect valuations to remain status quo, despite expectations of lower FY18 earnings,” say Ajith and Leong.

“SATS generated returns on invested capital ROIC of 17.3% (inclusive of dividends from associates) in FY17. While we expect returns to decline over the next two years mainly due to higher costs at Singapore, we are heartened that SATS plans to diversify away from Singapore via strategic JVs,” they add.

SATS’ JV with Wilmar to supply food in China, for example, is expected to breakeven in FY19.

The analysts are also expecting the group’s earnings to recover in FY19, following their projected 5% core net profit decline over FY18.

As at 11:13am, shares of SATS are trading 5.3% lower at $5.01.