SATS - UOB Kay Hian 2020-02-14: Weak 3Q Is In Line, Known Negatives Fully Priced In; Await Relief Measures From Budget 2020

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

SATS - Weak 3Q Is In Line, Known Negatives Fully Priced In; Await Relief Measures From Budget 2020

  • SATS (SGX:S58)'s weak 3QFY20 earnings are in line but 4QFY20 earnings are likely to fall by a larger degree. Still, the degree of operating leverage is low for flights handled and thus, margins on gateway services might not deteriorate substantially even with lower pax throughput at Changi.
  • Relief measures from Budget 2020 could be a buying catalyst.
  • Maintain HOLD. Target price is S$4.80.
  • Suggested entry level is S$4.30.



3QFY20 RESULTS


Earnings in line although we were expecting weaker operating earnings.

  • A 7.0% y-o-y rise in 3QFY20 EBITDA despite flat gateway services revenue ex-GTR was the key positive. SATS also indicated that normalised staff cost rose only 2% y-o-y in 3QFY20. Still, excluding the consolidation of Nanjing Weizhou Airlines Food Corp (NWA) and Country Food, 3QFY20’operating profit would have declined 10% y-o-y. Lower cargo handled and ship calls, along with higher IT and maintenance cost contributed to the weaker operating profit.
  • Excluding one-off gains of S$5.8m arising from the transfer of DFASS, underlying earnings declined 6% y-o-y. 9MFY20 net profit amounted to 82% of our full-year estimate and 72% of street estimate.
  • Excluding one-off gains, associate earnings declined 1% y-o-y due mainly to start-up losses of S$2m-3m at Beijing Daxing Airport. However, food solutions JV& associates fared well due to a turnaround at Malaysian food operations.
  • Cargo and cruise businesses have higher fixed cost and thus highest operating leverage. In contrast, a decline in flights handled at Changi Airport would have lower operating leverage. Similarly, lower inflight catering volume would have less impact on SATS compared to lower cargo volume or ship calls, due to higher automation at SATS’ kitchens.
  • SATS generated S$77.2m in operating cash flow (OCF) in 3QFY20, down 5.2% y-o-y, due to working capital changes. Excluding which, OCF would have risen 12.4% y-o-y.
  • Scope for relief measures from Budget 2020. During SARS, the government reduced the foreign worker levy by 50%. There is a strong possibility that Budget 2020 might offer similar relief along with lower licensing fees for airlines and other operators at Changi Airport. This could buffer some of the impact from lower visitor arrivals.


STOCK IMPACT


Forward bookings down 10.5% across Asia-ex Greater China for Mar-Apr 20, according to Forward Keys, a travel analytics firm.

  • This is in line with our base assumption. We have factored in an 11% y-o-y decline in pax throughput at Changi Airport for 4QFY20 (Jan-Mar 20). Forward Keys also noted that outbound travel bookings from Japan and Korea had declined 17% over the same period and this would impact earnings from TFK.
  • Data out of China showed a 50% y-o-y decline for the same period and is in line with expectations as China has halted group tours which account for half of outbound travel.

80% of revenue accrues from the aviation segment via gateway services and inflight catering.

  • This segment will undoubtedly be impacted over the next three months and we believe the street has factored in most of the known negatives. The key uncertainty is whether the impact would be short-lived or extend beyond Mar 20.
  • The Singapore Tourism Board has assumed that tourist arrivals will decline 25-30% in 2020 due to COVID-19. We believe the street has not factored in such a scenario.

Stay invested, look beyond the 4QFY20 and possibly beyond 1QFY21.

  • SATS’ strong balance sheet is largely unlevered. Excluding the capitalisation of operating leases, gearing stood at 0.06x. We also expect SATS to maintain its full-year dividend payout of 19 S cents.


EARNINGS REVISION/RISK

  • We lower our FY20 net profit forecast by S$1m to S$207m.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Reduction in rate of COVID-19 infections and relief measures from Budget 2020.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-02-14
SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.800 SAME 4.800



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