SATS - UOB Kay Hian 2019-07-19: 1QFY20 Hit By Triple Whammy Of Weak Air Cargo, Jet Airways Exposure & Grounding Of B737 Max Aircraft.

SATS LTD. (SGX:S58)

SATS - 1QFY20: Hit By Triple Whammy Of Weak Air Cargo, Jet Airways Exposure & Grounding Of B737 Max Aircraft.

SATS LTD. (SGX:S58)’ 1QFY20 earnings were below expectation and stand in contrast to the street’s expectation of a 6.8% y-o-y rise for the full year. We had warned that air cargo is likely to lead to lower 1QFY20 earnings, but we had underestimated the impact from Jet Airways and high opex.
We expect SATS to face cyclical headwinds over the next few quarters and this should lead to lower earnings and PE multiples.
Downgrade to SELL. Target: S$4.80.

The 14.4% y-o-y decline in net profit was higher than our estimate of a 4% y-o-y decline. The decline was broad-based at operating level and for associates. SATS was affected by the grounding of Jet Airways, which led to lower flights handled and inflight meals. Collectively, SATS made a S$3.3m provision for credit exposure, including that for the Indian associates.
Next, SATS was impacted by weaker cargo handled at Changi, which should not have come as a surprise to the street, given weak NODX numbers.
SATS indicated that the operating leverage was high and impact to operating profit was significant. This can be gleaned by the fact that staff costs rose 10.4% y-o-y, at a higher rate than top-line growth. D&A similarly rose 31% y-o-y, mainly due to the implementation of lease accounting on leased land and buildings.
Finally, SATS was impacted by the grounding of B737 Max aircraft.

SATS generated S$80m in part of the losses from Beijing Aviation Ground services. SATS however indicated that PT CASS reported better revenue and earnings and managed to pass on some of the earlier cost increases.

We reckon that SATS BRF and Evergreen Sky Catering were key contributors. However, we remain concerned about the industrial action that EVA Air’s flight crew is currently pursuing, which has led to cancellation of several flights. We believe the full impact of the flight cancellations would be felt in the coming quarters.

We expect cargo volumes will pose headwinds for SATS and gateway associates. We expect SATS noted in falter.
Amid these headwinds, we downgrade SATS to SELL as we expect valuation multiples to contract.

We lower our FY20/ FY21 net profit estimates by 5.4% for both periods, factoring in lower associate earnings and lower margins.

Downgrade to SELL with a target price of S$4.80 (S$5.05 previously).
We value SATS on 6.2%, 14.6% (previously 14.8%) and 2.2%. At our fair value, the stock will trade at 3.9%.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-19

SGX Stock Analyst Report SELL DOWNGRADE HOLD 4.80 DOWN 5.050