SATS - DBS Research 2020-10-01: Taking A Bold Stance, Upgrade SATS To BUY Ahead Of Vaccine Approvals

SATS LTD. (SGX:S58) | SGinvestors.io SATS LTD. (SGX:S58)

SATS - Taking A Bold Stance, Upgrade SATS To BUY Ahead Of Vaccine Approvals

  • Phase 3 clinical trials for about nine vaccines underway, commercialisation could happen in 2021.
  • More green/fast lanes being set up to aid essential business and official travel will lift travel volumes.
  • Assume post-vaccine normalisation in 2022 (FY23F), lift SATS's FY23F earnings by 34%.

Upgrade SATS (SGX:S58) to BUY ahead of vaccine approvals.

We see SATS as a candidate for vaccine recovery play.

  • Our healthcare team expects two vaccines to be available by 1Q21. With Phase 3 clinical trials for about 10 vaccines underway, we are subscribing to the fact that commercialisation could happen in 2021. We are thus assuming that normalisation will happen in 2022 (FY23F) and revise our FY23F earnings projections by 34%, towards a more normalised profit forecast.
  • As we approach commercialisation of any COVID-19 vaccine, we expect the stock to gradually re-rate back to pre-COVID-19 levels. SATS (SGX:S58) currently trades at an undemanding FY23F 15.7x PE. We are advocating buying ahead of the recovery while valuations are attractive. Our Target Price, based on normalised earnings in FY23F, is S$3.66.

Changi’s traffic cannot perform worse than during the Circuit Breaker period

Expect more green/fast lanes to be established, Changi’s throughput to improve.

  • Singapore currently has in place green/fast lane arrangements with five countries to facilitate essential business and official travel. As business activity resumes internationally post the Circuit Breaker period, we expect more of such lanes to be established going forward. This would help to boost passenger traffic and Changi’s throughput.

We believe the worst performance is over for Changi’s passenger throughput.

  • In terms of tourist arrivals to Singapore and passenger arrivals at Changi, we are way past our worst months in April and May. We are seeing sequential improvement of Changi’s throughput albeit at a slow and insignificant rate. It is thus safe to assume that the worst months of April and May are behind us. With more bilateral green/fast lanes established, we expect traffic at Changi to improve going forward.

Once a vaccine is found, we see mass travel returning very quickly, driving normalisation.

  • A vaccine would drive a sharp improvement in regional and international travel. While we are awaiting an effective commercialised vaccine to be developed, we expect air traffic at Changi to improve gradually. But once a vaccine is developed, Changi’s throughput should spike sharply as mass travel returns.

Phase 3 trials for at least nine vaccines underway, on track with our two available commercialised vaccine assumption

Vaccine could be available as early as 2021.

  • 4 international drug makers have moved into late-stage human studies in the US. According to WHO, 40 candidate vaccines are under clinical evaluation while 149 vaccines are under pre-clinical evaluation. Of these vaccines, at least nine candidate vaccines by their respective developers have reached Phase 3 efficacy clinical trials. The earliest estimated primary completion dates for two of the Phase 3 trials is November and December 2020.
  • The earliest estimated study completion dates would end as soon as March, April, May, October and December 2021. If results are positive, we could have a vaccine in 2021. The key risk is that the vaccines’ efficacy results are weak and concluded not to be effective. Even though some countries have approved vaccines for use, the drugs’ effectiveness are non-conclusive as there is absence of Phase 3 clinical trial data.

Not one but two vaccines.

  • Our healthcare team expects two vaccines to be available by 1Q21: Healthcare sector: Near turning point in pandemic battle. If that pans out, it could take another 3-6 months to manufacture, distribute, and to inoculate the wider population. Travel demand should thereafter recover fairly quickly and drive SATS's share price to re-rate.
  • Besides vaccine development news, it would also be important to watch out for news on border controls or restrictions, as well as travel bubbles, that would foster a recovery in air travel demand.

We now assume a vaccine is found in 2021 (FY22F) and earnings to normalise in 2022 (FY23F)

Our new recovery curve assumes a vaccine is found in 2021 (FY22F) and normalisation in 2022 (FY23F).

  • We had previously assumed mass travel recovery and return to pre- COVID-19 levels in 2023 (FY24F). This was premised on IATA’s recovery forecast and without reflecting vaccine development. Taking into account recent vaccine developments, we are pushing forward our recovery curve to assume that an effective vaccine is found in 2021 (FY22F) and a full year of mass-travel normalisation can begin in 2022 (FY23F).
  • We are now projecting recovery ahead by IATA’s projection which takes place in CY4Q23 (FY24F).

Our outlook now assumes a faster recovery.

  • Our outlook for SATS was generally a slow recovery. Our previous forecast tracks earnings normalisation in FY25F (2024), in line with IATA’s recovery projections. However, we are now assuming a vaccine is available in 2021 (FY22F) and normalisation would be achieved in 2022 (FY23F). This results in FY23F earnings change of 34%.
  • If a vaccine can be commercialised and mass produced in 2021 (FY22F), earnings should trend towards normalisation in 2022 (FY23F). Signs of recovery will be seen when mass travel returns to Changi.

DCF assumptions realigned to be more positive.

  • Our previous DCF projections for free cash flow to the firm were assumed to be gradual, we have now factored in earnings normalisation in FY23F (2022). This results in a more aggressive DCF-based valuation for SATS.

PB valuations are attractive at -0.5 SD.

  • With SATS expected to be in a loss for FY21F, forward PE valuations for FY21F (2020) is now less relevant. Instead, based on historical PB valuation, SATS now trades attractively at around -0.5 SD.

PE valuations based on pre-COVID-19 levels up till 30 June 2019 are attractive at -0.5 SD.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-10-01
SGX Stock Analyst Report BUY UPGRADE HOLD 3.66 UP 3.150