SATS - CGS-CIMB Research 2019-07-19: Wait For A Lower Entry Point

SATS LTD. (SGX:S58)

SATS - Wait For A Lower Entry Point

YTD SATS share price outperformance narrows total returns to c.5%. Downgrade to HOLD from Add with an unchanged Target Price of S$5.40 (21.9x CY20 P/E).
SATS share price trades at +1 s.d. of mean. We would look to accumulate at about < S$5.00 or upon sizeable earnings accretive M&As announcement.
SATS’ 1QFY3/20 net profit of S$55m was slightly below our S$60m forecast, dented by higher depreciation from SFRS 16 and the Jet Airways grounding.

SATS LTD. (SGX:S58)’s 1QFY3/20 net profit of S$54.7m formed 21% of our and consensus’ full-year expectations. Total revenue of S$465m (+11% y-o-y) was broadly in line, at 24% of our FY20F.
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 & vehicles, IT expenses, fuel costs and etc. This is offset by lower-than-expected raw material costs from better yield.

Revenue for Gateway was up 12% y-o-y thanks to the consolidation of passenger movements at Changi.
Underlying flights and passengers handled continued to grow 1-2% q-o-q and y-o-y. However, weaker freight volume and consolidation of GTR (lower EBIT margin of 8.9%) as well as higher expenses mentioned above dragged down overall margin to 12.2% (FY19: 13.5%).

In contrast to some SIA contract renewal since 1 Apr, revenue from Singapore food solutions stood.
Japan TFK revenue grew c.8% y-o-y to S$66m. We expect stronger growth in 2020, riding on the Olympics.

SATS made a full provision of S$3.3m for associates with the grounding of Jet Airways. Additional income loss from Jet Airways were $3m due to the loss of 500 flights in 1Q20.
On a positive note, Jet’s 9 inbound flights/day to Singapore will be filled by Vistara (2 flts) and Indigo (1 flt), and more airlines taking up the excess capacity, reducing the income loss in the quarters ahead.
Share of associates/JV profits of S$14.6m was above our S$10m on improved earnings from PT CAS concession fee pass-through to customers.

SATS is trading at 22x CY20F P/E or +1 s.d. of mean since 2006. Impending macro weakness may put pressure on traveling demand.
Sizeable M&A is a re-rating catalyst while a sudden plunge in aviation trend is a key risk.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-07-19

SGX Stock Analyst Report HOLD DOWNGRADE ADD 5.400 SAME 5.400