SATS - OCBC Investment 2020-02-14: Headwinds From COVID-19

SATS LTD. (SGX:S58)

SATS - Headwinds From COVID-19

SATS (SGX:S58)’s 3QFY20 revenue was up 17.6% y-o-y to S$545.6m, boosted by Food Solutions (+23.1% y-o-y) and Gateway Services (+10.9% y-o-y), and partially offset by lower cargo revenue and lower ship calls.
The growth in Food Solutions was mainly attributable to the consolidation of Country Foods (CFPL) and Nanjing Weizhou Airline Food (NWA) while the increase in Gateway Services’ revenue was driven by the consolidation of GTR entities.
Group expenditure rose 21.1% y-o-y, due to the consolidation of GTR, CFPL and NWA. Stripping out the impact of consolidation, group expenditure would have increased 3.1% y-o-y mainly due to IT expenses for digitalisation and transformation.
All-in, 3QFY20 PATMI fell 13.9% y-o-y to S$59.3m, making up 24% of our initial full year forecast, which met our expectations.

For 9MFY20, SATS’s passengers grew 55% and flights handled rose 124% y-o-y, driven by the consolidation of GTR in Malaysia. Meals served rose 14% y-o-y driven by growth across all markets with China registering the strongest growth.
Separately, cargo volume remained sluggish which was down 2% y-o-y.
On 13 Jan 2020, SATS announced the winning of a 25-year cargo terminal concession in King Khalid International Airport in Riyadh which will be SATS’s second cargo terminal operation in Saudi Arabia, with construction expecting to be completed in mid- 2022. We view the operation of new cargo terminal as a strategic move to extend SATS’s Asian network to Middle East linking Oman, Dammam and Riyadh, providing greater efficiency and connectivity.

Management cited their concerns on the potential impact of COVID-19 on SATS’s operations which could weigh heavily on passenger and cargo volumes. Singapore Tourism Board (STB) estimated that visitor arrivals to Singapore may fall by 25-30% in 2020 due to the COVID-19 outbreak while China is likely to be hit harder with management projecting to see a 40% fall in visitor arrivals in February. Japan, being SATS’s third largest market by revenue contribution and also the second highest country with confirmed number of COVID-19 cases could also see both its aviation and non-aviation catering businesses under pressure from the outbreak and travel restrictions on Chinese visitors.
Recall that during the 2003 SARS episode, SATS reported a significant drop in flights handled (-15.9% y-o-y), meals catered (-11.1% y-o-y) and passengers served (-13.2% y-o-y). We are expecting to see a similar pattern at this point of time and believe that SATS’s operating margin is likely to come under pressure for the next 3 quarters (down to ~7-10%).
Factoring the potential headwinds, we trim our 4QFY20/FY21 revenue forecasts by 45% and 19% respectively. As such, our fair value estimate decreases from S$5.28 to S$4.73.
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Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2020-02-14

SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.73 DOWN 5.280