SATS 4QFY20 - UOB Kay Hian 2020-07-13: S$51m In Credit And Impairment Provisions; Guides For Lower Loss In 1QFY21

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SATS LTD. (SGX:S58)

SATS - 4QFY20: S$51m In Credit And Impairment Provisions; Guides For Lower Loss In 1QFY21

• Notwithstanding the guidance for lower loss in 1QFY21, we now believe SATS’ earnings would be under pressure for a long while due to heavy exposure to the aviation segment. SATS has shored up its balance sheet with S$500m in new debt in 4QFY20 and 1QFY21, which we believe could be a stop-gap measure to fund working capital.
• Maintain HOLD. Target price: S$2.93.
• Suggested entry price: S$2.60.

SATS 4QFY20 RESULTS

4Q earnings below guidance due to impairment provisions.

• Initial guidance was for 4QFY20 net profit to decline 60-70% y-o-y, or S$15m-20m. However, SATS (SGX:S58) recognised S$51m in credit and impairment loss for the quarter for the group, inclusive of a S$11.9m provision for impairment on associates and S$4.0m provision for doubtful debts.
• SATS indicated the impairment loss was performed based on DCF assumptions. Except for Singapore and Japan, all other regions recorded a loss for the quarter.
• SATS omitted a final dividend and this is in line with our estimates. Factoring in lease payments, operating cash flow fell 23% to $244m, while FCF fell 27% y-o-y.

On a cost control drive.

• Staff costs fell 25% y-o-y or S$59.8m in 4QFY20, aided partly by S$22m in government grants via the Jobs Support Scheme (JSS). SATS also reduced contract work and overtime work.

Associates earnings hit by credit loss and asset impairment.

• Gateway services swung to a loss presumably due to credit losses and asset impairment. We note that PATMI out of China registered a steep decline despite an increase in revenue.

Guides for lower loss in 1QFY21.

• The initial guidance was for a loss of S$50m-70m. SATS guided that the loss could be lower than S$50m, due to cost cutting initiatives as well as incremental revenue from providing catering to foreign workers at the Marina Bay Cruise terminal.

Taking steps to improve asset utilisation by channelling resources from aviation business to non-aviation business.

• SATS’ inflight catering kitchen is now catering towards the distribution to wholesale and retail outlets as well as home deliveries.

Demand destruction is likely to be more severe than initial expectation.

• SATS guided that revenue from aviation services is unlikely to reach pre-COVID-19 levels before 2023. We now lower our FY21 flight-movement and pax-movement assumptions at Changi from a 38% y-o-y decline to a 45% y-o-y decline. While SATS would be proactively cutting costs and will benefit from the JSS scheme (estimated S$280m), we are concerned about the high operating leverage for its Singapore and Chinese operations.

Increased borrowing raises risk profile.

• SATS has also raised S$300m in new debt as at 4QFY20 and a further S$200m as at 1QFY21. We believe that SATS could be concerned about working capital funding and delays in payments by customers.

EARNINGS REVISION/ RECOMMENDATION

• We raise our FY21 net profit estimate by S$17m to S$69.0m as we factor in lower losses for 1QFY21. However, ROIC is likely to decline due to higher borrowing.
• Maintain HOLD for SATS with a target price of S$2.93 (S$3.30 previously).
• See SATS Share Price; SATS Target Price; SATS Analyst Reports; SATS Dividend History; SATS Announcements; SATS Latest News.
• We continue to value SATS on EV/Invested Capital basis but have lowered our sustainable ROIC from 11.8% to 8.1% and sustainable growth rate by 0.6ppt. At our fair value, SATS will trade at 19x FY23F PE.
• Share price catalyst: none in the near term.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-07-13

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.93 DOWN 3.300