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

SATS LTD. (SGX:S58) | SGinvestors.io 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.

Revenue in line, negative jaw from higher expenses

  • 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.

Gateway steady weaker

  • 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%).

Food not pressured, Japan

  • 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.

Jet Indonesia earnings

  • 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.

Macro environment caps premium valuation

  • 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