SATS - CGS-CIMB Research 2021-02-11: Bottomed Out

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

SATS - Bottomed Out

  • SATS's 3QFY21 S$8.2m core profit above our forecast of S$3.5m. Reported S$2.8m loss including S$22.5m impairment expense (S$11.5m for PPE, S$11m for investment).
  • Associates’ contribution was a positive surprise with S$3.5m profit after 3 consecutive losses, thanks to strength in cargo and aggressive cost control.
  • SATS's net cash of S$122m supports M&As in either central kitchen in China/India or cargo handling capabilities in major aviation hub. Maintain ADD.

SATS's underlying profit would have been stronger

  • SATS (SGX:S58)’s 3QFY21 (Oct 2020 to Dec 2020) reported losses of S$2.8m included impairment for PPE (property, plant and equipment) of S$11.5m and impairment loss from an associate of S$11m. 9MFY20 reported losses of S$79.7m. See SATS's announcements.
  • In the calculation of its 3Q core profit of S$8.2m, SATS included only the impairment loss from associate as impairment of PPE is categorised as normal course of business. If we exclude the impairment of PPE, SATS’s 3QFY21 underlying profit would have been S$19.7m. The strength came from associates’ profit of S$3.5m (vs. our expected loss of S$10m), lower finance expense and taxes. 9MFY21 core loss stood at S$37m vs our FY21F core loss of S$36m. We expect a recovery in 4Q21F.

Higher-than-expected staff costs and raw material costs

  • SATS's overall revenue was up 9% q-o-q to S$251m and in line with our expectations, but opex of S$247m was 11% higher than our forecast; the variance came from higher staff costs (government relief in 3QFY21 was ~S$69m vs S$78m in 2QFY21) and raw materials (+11% q-o-q) in tandem with growth in the non-aviation food trading business – Country Foods which typically yield lower margins, in our view.
  • In 4QFY21F, we factor in staff costs increasing by 15% q-o-q as government relief tapers. SATS has demonstrated aggressive cost reduction as headcount was reduced to 11.8k vs 18k a year ago. We expect some form of government relief to be announced in Singapore’s upcoming budget on 16 Feb.

Gateway revenue up 20% q-o-q, largely from cargo

  • Gateway revenue of S$105m came largely from cargo handling. SATS's management believes there is scope for better operating leverage for cargo to return to pre-COVID levels in 2018. EBIT margin for cargo is generally higher in the mid-teens.

Associates a beat thanks to cargo, pharma and cost cutting

  • SATS's pure cargo handling associates in HK, India, PT Jas and Taiwan were the key beneficiaries of stronger volume, helped by shipments of pharmaceutical vaccines.
  • Gateway associates turned a profit of S$7.9m (from loss of S$1.7m in 2QFY21).
  • Meanwhile, food solutions associate losses also narrowed significantly to S$4.4m (vs S$11m in 2QFY21) with steep cost-cutting measures as well as capping of share of losses to the equity value of China JV.

Maintain ADD on SATS

M&A to expand central kitchen/cargo handling

  • Backed by net cash of S$122m, SATS aims to build upon the central kitchen trend in China and India, either greenfield or brownfield. It will also look for M&As in air cargo, especially in handling of perishable, e-commerce in larger airports and major hubs beyond India and China.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-02-11
SGX Stock Analyst Report ADD MAINTAIN ADD 4.300 SAME 4.300