SATS - UOB Kay Hian 2020-05-04: Warns Of S$50m-70m In 1QFY21, Shoring Up Balance Sheet With S$500m MTN

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SATS - Warns Of S$50m-70m In 1QFY21, Shoring Up Balance Sheet With S$500m MTN

  • Not withstanding the general expectation of a tapering in new COVID-19 infections, we believe that the operating environment for airlines has deteriorated over the past one month, with airline failures and talk of the implementation of social distancing on aircraft.
  • SATS (SGX:S58)’s profit warning for 1QFY21 does not surprise, but we believe the pace of recovery will be slower than previous expectation. Hence we downgrade the stock to HOLD.
  • Target: S$3.30. Suggested entry range: S$2.80-2.90.

SATS issues profit warning -

  • SATS' FY20 net profit expected to decline by 25% y-o-y, while 1QFY21’s net profit could decline by S$50m-70m. SATS also indicated that 4QFY20’s net profit could decline by between 60-70% y-o-y. The guidance for 4QFY20’s earnings are better than expected, compared with our initial estimate of a loss of S$16m.
  • Full-year earnings are likely to be about 2-3% lower than street’s full-year estimate. Still, it would be SATS’ guidance of a S$50-S$70m net profit decline for 1QFY21 that would be cause for concern. SATS indicated that the estimate comes on the back of a 95% decline in pax handled, flights handled and meals from pre-COVID-19 levels.
  • At this stage, we are unsure if the estimated losses include wage support grants, which could approximate S$30m per month for nine months. Still, how SATS manages its wage cost, which as at 9MFY20 accounted for 53% of opex, would be key to FY21 and FY22’s earnings.

Lowering our flight movement, pax movements and meals served assumption at Changi from a 30% y-o-y decline to 38% y-o-y decline in FY21.

  • We had previously assumed that 2QFY21 and 3QFY21’s flight and related operating statistics would decline by 43% y-o-y and rise by 7% y-o-y in Q3FY21.
  • Our more cautious stance is based on expectations of slower recovery for international flights and higher airline failures. We are also concerned that airlines might have to incorporate safe distancing on certain routes, especially to EU.

Food solutions division would be less impacted because of the acquisition of SATS BRF in Sep 20.

  • SATS BRF distributes frozen meat and halal food to local and international retailers. We believe demand would not be impacted by adversely impacted because of COVID-19. Meanwhile we have lowered our inflight catering revenue assumptions out of Singapore & Japan from about 34% in FY21 to a 40% y-o-y decline.

SATS also announced a S$500m 5-year MTN programme at 2.60% p.a, payable semi-annually.

  • SATS indicated that the proceeds would for working capital, capex, capital management as well as to refinance a loan. SATS has a S$93m JPY floating term loan expiring in FY21. Even factoring in recent acquisitions, the size of the MTN appears to be relatively high.
  • There is a possibility that SATS is shoring up its cash reserves in the event of default by some of its airline customers or for potential capital injection for some of its associates.

Uncertain as to when traffic will recover, but SATS will undertake appropriate cost and risk management measures.

  • The above guidance by SATS underscores the uncertain operating environment. About 80% of SATS’ revenue accrues from the aviation sector and SATS could face doubtful debts if customers default. We believe that Virgin Australia, which is undergoing voluntary administration, could be an airline customer.

A recovery back to pre-COVID-19 levels could take more than two years.

  • According to Cirium, about two-thirds of global passenger fleet are currently grounded. Most of these aircraft will only be reintroduced gradually. Geo-political tensions could also impact the pattern of air travel and this could impact connecting traffic out of Singapore. As such, we believe that it would take at least three years before earnings recover to pre-COVID- 19 levels.

Downgrade to HOLD.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-05-04
SGX Stock Analyst Report HOLD DOWNGRADE BUY 3.30 DOWN 3.960