SATS LTD. (SGX:S58)
SATS - Expect Greater Operating Leverage From Cargo Operations In FY22
- Excluding S$32m in impairment losses SATS surprised with a significant q-o-q improvement in 2QFY21’s losses, partly due to a S$28m increase in JSS. However, we believe that SATS would have also generated positive operating leverage from a 22% q-o-q increase in cargo tonnage at Changi.
- Next, SATS indicated that its non-aviation business had gained momentum. Going forward, SATS is well placed to benefit from higher cargo volumes, particularly from the delivery of vaccines.
- Maintain HOLD. Target price: S$3.62. Suggested entry price S$3.30.
SATS's 1HFY21 Results
Sequential improvements in earnings as 2QFY21's core earnings fell by onl S$1.6m vs underlying loss of S$43.7m in 1QFY21.
- SATS (SGX:S58) also recognised a S$32m impairment loss on an ASEAN associate, which we believe could be due to its investment in Ground Team Red (GTR). Excluding this, 1HFY21’s earnings were above expectations. Part of the improvement in underlying profit came from a S$28m q-o-q increase in Job Support Scheme (JSS) grants in 2Q.
Revenue for 2QFY21 also rose by 10% q-o-q, mainly due to higher gateway services revenue.
- This was due to higher cargo uplifted. We note that cargo throughput at Changi had risen by 22% q-o-q. SATS also recognised S$7.7m in doubtful debts for the quarter.
- No interim dividend was declared by SATS. See SATS Dividend History.
SATS is focused on growing on non-aviation revenue, which in 2QFY21, rose by 35.2% y-o-y.
- This was attributed to increased sales to fast-casual restaurants and supermarkets with a wider range of products and services. SATS indicated that this growth will extend in the next quarters and will cushion the impact of slower aviation revenue.
Operating cash flow for 1HFY21 swung to a positive S$19m vs a deficit of S$62m in 1QFY21.
- We believe this was due to higher JSS and a reduction in headcount by 500 or 3.7% of workforce. SATS also guided for further headcount reductions.
Ready for vaccine delivery.
- We had previously highlighted that SATS will benefit from the cold-chain storage and transportation of COVID-19 vaccines and the company affirmed this - indicating that vaccines can be cooled via liquid nitrogen to prevent temperature excursions. SATS indicated that its Singapore and Indian associates’ cool chain facilities are certified by the International Air Transport Association to handle specialised pharmaceutical products.
Three key takeaways:
- SATS’s new business ventures are gaining momentum, but we are unsure of the earnings impact;
- operating leverage from higher air cargo throughput is significant and the distribution of vaccines will lead to incremental earnings;
- SATS also indicated that it aims to keep staff costs low by focusing on technology to capitalise on revenue. On the flip side, costs should rise in FY22, due to a steep reduction in JSS (we estimate that SATS would receive about S$300m in JSS for FY21).
SATS - Valuation & Recommendation
- We lower our SATS's FY21 loss forecast by S$20m and raise our FY22 earnings estimate by S$60m, factoring in higher earnings from air cargo and new businesses.
- Maintain HOLD. SATS's target price raised to S$3.62 (Previously S$3.40).
- We previously valued SATS at 16x (-1SD to 5 year mean) FY22/23 OCF and derived a target price of S$3.40. We now value SATS on a DCF basis on recurring FCF, with WACC at 7.0% and terminal growth rate of 2.7%.
- See SATS Share Price; SATS Target Price; SATS Analyst Reports; SATS Dividend History; SATS Announcements; SATS Latest News.
K Ajith
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-11-13
SGX Stock
Analyst Report
3.62
UP
3.400
