SATS - CGS-CIMB Research 2020-02-06: Ground Check ~ It’s Quiet In Changi…

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SATS - Ground Check: It’s Quiet In Changi…

  • We cringed at the quiet terminals in Changi during what used to be peak arrival times from China, as well as cancellations by carriers from Indonesia.
  • We turn bearish as the number of confirmed cases of Coronavirus in Singapore is still rising. Earnings outlook for SATS (SGX:S58) appears cloudy.
  • We pencil in a 50% q-o-q plunge in profit (S$30m) for 4QFY3/20F on weaker-than-SARS operating leverage. Downgrade to REDUCE; target price cut. See SATS Target Price.

Ground check at Changi terminals

  • We did a ground check during the previously peak arrival period from 2-3:30pm, and Changi terminals 1 to 3 were quiet. Flights from Xiamen Airlines, China Eastern Airlines, Air China, Scoot and SIA from Shanghai, Beijing, Fuzhou, Chengdu, Hangzhou and Qingdao were cancelled. There were also some cancellations of flights from Bandung, Jakarta and Bali.
  • Other than pharmacy, the arrival halls and retail outlets footfall were weak. We believe general confidence to travel could take time to restore, even if countries and airlines lift the ban on flights to/from China.
  • The latest number of confirmed cases of Coronavirus in Singapore has risen to 28, making the country the second highest number of cases after Japan (33, another key market for SATS).

How risky are earnings?

  • Recall that SATS’ revenue plunged 29% q-o-q in 1QFY3/04 and recovered 25% the following quarter. Profit was down a sharper 39% q-o-q in 1QFY04 and recovered 82% in 2QFY3/04 with the help of cost-cutting measures. EBIT dropped from 21% in 4QFY03 to 14% in 1QFY3/04.
  • China is a much bigger source (c.11% for 2019) of air passenger arrivals in Changi than in 2003 (6%). Our airline analyst is penciling in two quarters of losses for SIA Group on aggressive capacity cuts (see report: Singapore Airlines (SIA) - Full-Year Profit To Be Hit By Wuhan Virus).
  • Instead of a SARS V-shaped earnings pattern, we pencil in a U-shaped pattern for SATS due to the stretched operating leverage now vs. then. We assume EBIT margin of c.8% and 10% for the next two quarters, with little room to maneuver on huge cost-cutting measures. Note that EBIT margin dipped to 4% in 4QFY3/07 during the GFC.

China could be the Achilles’ heel in the short term

  • Greater China accounted for c.4.8%, or S$12m, of SATS profit in FY19. These include AAT HK (cargo), Evergreen Group in Taiwan, Kunshun Food, Beijing Airport Inflight Kitchen and Beijing Aviation Ground Services. Beyond travel demand, we think the viral epidemic could also hurt non-aviation consumption and dampen operating leverage in China, including the upcoming central kitchen in Tianjin expected to come onstream in 2020, delivering c.100,000 meals for restaurant customers - Yum group, Hai Di Lao, etc.

Target Price cut (CY21F P/E of 19x, on 0.5 s.d. of 6-year mean)

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-06
SGX Stock Analyst Report REDUCE DOWNGRADE HOLD 4.07 DOWN 5.400