SATS - DBS Research 2020-05-05: Anticipate Slow Recovery

SATS LTD. (SGX:S58)

SATS - Anticipate Slow Recovery

Profit warning points to lower than expected earnings.
SATS' 4QFY20 and 1QFY21F earnings to disappoint significantly due to low Changi throughput.
Forecast losses for FY21F before recovery in FY22F.

SATS (SGX:S58) has released management guidance for 4QFY20F and 1QFY21F. Due to COVID-19 and travel restrictions across the world, throughput and passenger arrivals at Changi have plummeted.
SATS now expects 4QFY20 earnings to dive by 60-70% y-o-y and up to 25% in FY20F. 1QFY21F net loss guided to be S$50-70m: Including the government support scheme, 1QFY21F net loss is guided to be between S$50-70m, largely affected by a 95% drop in volumes of flights, passengers and meals.

Both Singapore tourist arrivals and Changi’s passenger arrivals have declined dramatically from February 2020 by close to 90% y-o-y. This has a knock-on effect on SATS, whose primary source of revenue is derived from Changi Airport.
In April, Changi also announced the closure of Terminal 2 for 18 months from 1 May 2020 till November 2021 to save costs due to poor air traffic and for upgrading works. We estimate Terminal 2’s annual capacity to be 20-25 million passengers and the closure is an indication of low throughput expected at Changi.

SATS raised debt recently to shore up liquidity. It raised S$200,000 fixed notes on 31 March at 2.88% due 2025 and S$100,000 fixed notes on 24 April at 2.6% due 2025. Including other sources, aggregate debt funding amounted to c.S$500m for working capital, contingency cash reserve and strategic growth initiatives.

Taking into account the profit guidance for 4QFY20 and 1QFY21, our previous estimates were too optimistic. Imputing 4QFY20 guidance, we now expect FY20F net profit to decline by 22% y-o-y. We do not believe the aviation sector would recover to normal operating level anytime soon.
With 1Q21 net loss guidance of S$50- 70m being worse than expected and projecting a gradual quarterly improvement of net losses, our FY21F net loss is revised to S$136m. We anticipate a slow recovery with net profit of S$59.4m in FY22F.

Our Target Price is lowered to S$2.61 based on the average of DCF and PE methodology. Our DCF values SATS at S$3.89, factoring in a recovery over the longer term (WACC 5.7%, t=3%).
Our PE component is pegged to 25x FY22F PE, in line with peers’ average, at S$1.33. See attached PDF report for peer comparison details.
Maintain FULLY VALUED as we anticipate slow recovery with losses in FY21F before turning profitable in FY22F.
See SATS Share Price; SATS Target Price; SATS Analyst Reports; SATS Dividend History; SATS Announcements; SATS Latest News.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-05-05

SGX Stock Analyst Report FULLY VALUED MAINTAIN FULLY VALUED 2.610 DOWN 2.66