SATS - CGS-CIMB Research 2020-10-26: Slow Recovery; Not Cheap Enough

SATS LTD. (SGX:S58)

SATS - Slow Recovery; Not Cheap Enough

SATS (SGX:S58) is a travel recovery proxy but the pace of bilateral green lanes to be established globally could move at a slow pace with intermittent resurgence.
Relative to airlines, SATS is set apart by its strong balance sheet (cash balance of S$724m at end-1Q21) with minimal capex (S$60m-70m p.a.).
SATS's share price trades at 37x FY22F P/E, above its pre-COVID-19 3-year average of 25x (2017-2019).

We think the worst of travel crisis could be over as global governments strive to reopen borders and are unlikely to re-impose strict lockdowns, supported by hopes of a vaccine in the near term. With this, we expect SATS’s operations and losses to gradually narrow and believe that SATS’s 1QFY3/21 was its worst quarter with losses of S$43.7m.

However, the pace of actual recovery in terms of operational statistics and profitability could be slow. We expect SATS's losses to continue into 1QFY3/22F on the back of a gradual recovery of 60-70% in capacity from 1QCY21 as essential travel resumes on a broader basis.

As travel bubbles are progressing slowly, the saving grace for SATS is cargo handling, driven by the thriving e-commerce trend as well as the rising demand for perishables and pharmaceutical goods.
In Singapore, cargo handling has staged a relatively strong rebound, vs. pax and flight handling, at Changi with cargo handling down 26.6% y-o-y in Sep 2020. The positive cargo handling trend is also seen at its associates in Indonesia and Hong Kong.

See PDF report attached below for more details on how COVID-19 has impacted SATS, and also SATS’s plan of action to survive the pandemic.

Current valuations are not cheap, at 37x FY22F P/E which is above its pre-COVID-19 3-year average of 25x (2017-2019).
We maintain HOLD on SATS as we believe downside risk is limited on the back of positive newsflows of borders reopening but the pace of recovery could still be slow.
See SATS Share Price; SATS Target Price; SATS Analyst Reports; SATS Dividend History; SATS Announcements; SATS Latest News.
Previously a high-ROE and strong dividend yield company, we forecast SATS to turn into net gearing position of 4% in FY20F which could affect its c.80% dividend payout trend over the past seven years. We think that airlines’ woes could also lead to EBITDA margins squeeze for SATS when travel resumes.
Besides aviation, mass market food production is also a lower-margin business segment. We believe there is a long-term mean de-rating possibility.
SATS's share price is 92% correlated to Changi’s passenger and flight movements, and 77% correlated to cargo volumes over a 4-year period since October 2016. Hence, key re-rating catalysts still depend on border reopening for discretionary travel, and vaccine availability.
Key downside risk to our call is uncontrolled resurgence of the COVID-19 outbreak globally.
Relaxation of leisure travel restrictions is a key upside risk.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-26

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.000 SAME 3.000