SATS LTD. (SGX:S58)
SINGAPORE TECH ENGINEERING LTD (SGX:S63)
SINGAPORE AIRLINES LTD (SGX:C6L)
Aviation - SATS & ST Engineering Will Be Key Beneficiaries Of COVID-19 Vaccine Distribution
- We are not confident that borders will reopen by end-20 and thus do not expect any improvement for SIA or SATS. However, if a vaccine is developed by year-end or 1Q21, SATS will benefit directly via the provision of critical pharmaceutical logistics and the handling for the Asia-Pacific region.
- Meanwhile, ST Engineering could benefit from higher maintenance works on return-to-service checks for grounded aircraft ahead of an anticipated traffic recovery. Maintain MARKET WEIGHT on the sector.
- Suggested entry prices for SATS and ST Engineering are S$2.75 and S$3.30 respectively.
Factoring in a COVID-19 vaccine development by end-20.
- Newsflow has been generally positive on the development of vaccines with China’s CNBG and SinoVac announcing plans to roll out three COVID-19 vaccines by end-20 with a combined production volume of 600m doses by 2020. While AstraZeneca has paused trials after an adverse reaction in one among the thousands of participants, the general expectation is that a working vaccine would be available by early-21. The World Health Organisation (WHO) expects mass vaccination to commence only by mid-21.
Even if vaccine development gains momentum, borders are likely to remain closed, possibly even till 1Q21.
- The majority of Asian countries continues to impose 14-day quarantine on all arrivals. Even if leisure travels were to be allowed (such as in Japan for specific countries), travellers face the prospects of a cumulative 28-day quarantine which will likely discourage travel.
- While Singapore has eased travel restrictions to Malaysia, Brunei and New Zealand, it is only for essential and business travels to and fro for the first two, while New Zealand’s borders remain closed. Malaysia also banned the entry of travellers from countries that more than 150,000 cases.
ST Engineering could benefit from an increase in return-to-service checks in anticipation of COVID-19 vaccine-led travel recovery.
- ST Engineering (SGX:S63) has aircraft maintenance hangars in China and the US. In China, its hangars are in key hubs in Guangzhou and Shanghai and flight movements out of China have recovered to 80% of pre-Covid levels as at August, due to a rapid recovery in domestic traffic. Still, ST Engineering’s biggest aerospace exposure is in the US where about 50% of aircraft is still grounded. If more Americans opt to be vaccinated, then airlines would restore grounded aircraft to service.
- ST Engineering will benefit from return-to-service checks for temporarily parked aircraft and more extensive flight worthiness check on airlines grounded for longer periods, although this is likely to take place in early-21 at best.
ST Engineering will also benefit from the recently announced enhanced JSS.
- Employees in the aviation and the marine sectors will benefit from an additional 7 months of payout with subsidy of 50% and 30% respectively under the Jobs Support Scheme (JSS). We have assumed ST Engineering will receive about S$90m in additional JS payout for 2021.
SIA could potentially exhaust its S$8.8b in rights and convertible debt proceeds by end-Mar 21
- Singapore Airlines (SIA, SGX:C6L) could potentially exhaust its S$8.8b in rights and convertible debt proceeds by end-Mar 21 unless it manages to defer a large part of the S$2.0b in advance payments for flights. As of August, the carrier had utilised S$4.4b of the proceeds with S$2.9b used for debt repayment and S$1.1b for ticket refunds and settlement of fuel hedging contracts. However, SIA had S$5.5b in current trade-related liabilities (including S$2b in advance bookings) and S$1.6b in derivative liabilities as at end-Mar 20. Even assuming the derivative liabilities diminish in value, we estimate SIA would have at least a further S$6b in payables by end-Mar 21.
- SIA also had S$2.7b in short-term debt as at end- FY20 but we believe this has been fully repaid as at Aug 20.
- In addition, from an operating perspective, we estimate SIA would be burning S$200m-300m per quarter inclusive of lease payments for 2Q-3QFY21.
Lower Brent crude prices would raise SIA’s derivative liabilities and book value.
- We estimate SIA would have outstanding Brent hedges of 110m bbl as at 1QFY20.
SATS could benefit from the provision of cold-chain cargo for vaccines in the region.
- SATS (SGX:S58)'s Coolport@Changi is ISO certified and is the world’s first centre of excellence for pharmaceutical handling. Given Singapore’s status as a key transshipment hub, SATS is likely to play a significant role in the transportation and storage of vaccines to the Asia-Pacific region.
- SATS’ Indonesian associate PT JAS is also certified to handle pharmaceutical products. IATA has called for the special air traffic rights in support of the delivery of vaccines as well as tariff relief and priority of arrival to prevent temperature excursions due to delays. IATA has also indicated that a single dose of vaccine to the entire world population would require 8,000 B747 Jumbo Jets, which is about half the global fleet of all commercial aircraft prior to COVID-19.
SATS and ST Engineering are two key beneficiaries of COVID-19 vaccines.
- While SIA would theoretically be the most direct beneficiary, its financial position could possibly be severely weakened prior to a global distribution of vaccines. See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.
- We have also raised SATS’ FY22 earnings by S$70m but still expect a full-year loss due to a steep reduction in JSS. We have factored in S$40m in enhanced JSS for FY22. We have also raised our 2021 net profit estimate for ST Engineering by 25% to S$505m.
- Upgrade SATS to HOLD from SELL with a target price of S$3.10 (from S$2.67). For SATS, we have raised our long-term ROIC assumption from 7.9% to 8.3%. See SATS Share Price; SATS Target Price; SATS Analyst Reports; SATS Dividend History; SATS Announcements; SATS Latest News.
- Maintain HOLD on ST Engineering but with a higher target price of S$3.60 (from S$3.40). We continue to value ST Engineering on an EV/invested capital basis but raise our terminal growth assumption by 0.2ppt. See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.
K Ajith
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-09-11
SGX Stock
Analyst Report
3.10
UP
2.670
3.60
UP
3.400
3.640
SAME
3.640
