Company Overview
Saigon Cargo Service (SCS) is an air cargo terminal operator located in Tan Son Nhat (TSN) airport. As of the end of 2017, the company held a 33% market share of cargo throughput at TSN airport. SCS also leases apron, offices and soccer fields, all located on the same plot of land.
Key Summary
- We reiterate our BUY rating on SCS with a target price of VND185,100 per share, implying a total stock return of 23.8%.
- We maintain our 15% international volume growth assumption for 2018 as we expect volumes to accelerate from Q2 after a slow Q1.
- We forecast 2018 revenue to grow 16.7% YoY to VND687bn (USD30.3mn) and NPAT to grow 24.7% YoY to VND429bn (USD18.9mn).
- SCS’s HOSE listing will likely take place before its AGM at the end of June.
- We continue to be bullish on SCS because of (1) vibrant air cargo transport demand in Vietnam (around 15% per annum, according to the Civil Aviation Authority of Vietnam), (2) SCS’s duopoly market position with high barriers to entry at Tan Son Nhat (SGN) airport and (3) low capex needs, low financial leverage and cash conversion of 90%.
- The key risks to our SCS investment thesis remain (1) SGN airport capacity constraints (2) cyclical trade flows and (3) possible M&A activity.
International cargo volumes should be back on a growth trajectory from Q2. We maintain our full-year 15% international volume growth assumption for SCS, despite a slower than expected Q1, as we anticipate volumes will accelerate from Q2. Q1 2018 international volume only grew 3%-4% as a major client reduced its flight frequency to/from SGN from Q2 2017, but this loss has since been offset by other clients ramping up volumes. Looking forward, we expect continued volume growth from existing clients and additional volume from a new major client, Japan Airlines, who was onboarded in May 2018.
Margin expansion continues as expected. SCS’s flexible workforce and stable depreciation costs boosted SCS’s GPM to 79.2% in Q1 2018 from 77.5% in Q1 2017. We currently assume SCS’s GPM and NPM will expand further and reach 87.5% and 72.0%, respectively, by 2022, thanks to SCS’s low capex needs and high operating leverage.
Impact of SGN runway maintenance on SCS’s valuation should be minimal. ACV recently said it intends to complete maintenance of SGN airport runways, pending approval from the MoT, over four consecutive off-peak months in 2019, shutting down one of the two current runways at a time. As the impact of the maintenance is isolated to this period, our five-year DCF valuation would remain broadly in line at ~VND184,396 (19.7% upside, excluding dividend yield). This assumes SCS’s 2019 NPAT growth would fall 7% YoY.
Lack of M&A opportunities should translate into high cash dividend. SCS’s intention to expand into other businesses and/or segments remains on ice because of a lack of attractive opportunities. We therefore expect SCS to pay a high cash dividend of around VND5,500 per share in 2018 rather than issue a stock dividend.
(Source: VCSC - Viet Capital Securities)
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