SATS - DBS Research 2021-05-28: Recovery Trajectory Pushed Back Slightly

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

SATS - Recovery Trajectory Pushed Back Slightly

  • SATS's 4Q21 core net profit above expectations.
  • Cargo operations are close to pre-COVID-19 levels; non-travel related revenue was up by 38% in FY21.
  • Flare-up of new cases and sluggish vaccine rollout in the region to delay recovery slightly.
  • Maintain BUY call on SATS with unchanged target price of S$4.50.

SATS's 4Q21 results above expectations; M&A on the cards

  • SATS (SGX:S58) reported 4Q21 core PATMI of S$13.2m, and full-year core net loss of S$23.9m, which was better than the street’s projection of a net loss of S$30.1m.
  • Outperformance during the quarter was largely driven by robust recovery in its top line (+11% q-o-q, +33% against the trough 1Q21), and lower-than-expected operating costs. Excluding government support, however, SATS would have remained in the red with a core net loss of S$33.0m in 4Q21, and a net loss of S$265.8m for FY21.

Operational activity levels continued to be subdued

  • Operational activity levels continued to be subdued in 4Q21 amid lockdowns spurred by a resurgence in COVID-19 cases; cargo and non-aviation businesses remain as bright spots. Passengers and flights handled dipped by 7.4% and 8.3% on a sequential basis respectively due to Malaysia’s MCO curbs in the quarter.
  • Contrarily, SATS’s cargo operations fared much better, and registered growth of 5.9% q-o-q and was only down by 30% compared to pre-crisis levels. Similarly, SATS’s non-travel related revenue grew by 32% y-o-y in 4Q21 on the back of increased food product sales to retail chains, fast-casual restaurants and government entities.

Robust balance sheet to capitalise on M&A opportunities; dividends off the table for now

  • SATS was in a net cash position of S$202m as of Mar-21, up from S$134m in Mar-20, on the back of positive free cash flow of S$56.2m (- 66.6% y-o-y) in FY21.
  • Back in 3Q21, the management shared that they were interested in M&A in the cargo space and would like to expand SATS’s presence in larger airports/major hubs, potentially beyond India and China. At this juncture, the management shared that they are evaluating several attractive acquisition targets and are hopeful on closing some deals in the near future.
  • Meanwhile, we trimmed our dividend projections as the company also shared that dividends will only be resumed when SATS can generate positive earnings without government aid, which is unlikely to occur until late FY22F or early FY23F.

Cut SATS's FY22/23F net profit estimates by 58%/7% to reflect near-term COVID-19 headwinds.

  • We are less sanguine on SATS’s near-term prospects as the reopening of borders in Asia will likely occur at a measured pace due to the resurgence in new COVID-19 cases (driven by new variants), and uninspiring pace of vaccination in the region. However, we still expect a significant uplift in air travel activity in FY23F, as countries make further progress towards achieving herd immunity and significant pent-up demand drives a front-loaded recovery when travel restrictions are finally relaxed.
  • Stronger-than-expected growth in its non-aviation food business which boasts higher margins (due to the high operating efficiencies of its central kitchens and food factories) or earnings accretive M&A activity (which we have not pencilled in for now) could cause the company’s earnings to surprise on the upside.

Maintain BUY call on SATS with unchanged target price of S$4.50.

  • Despite the downward revisions to our net profit estimates, our target price for SATS remains unchanged as we roll forward our P/E peg to 25.0x blended FY22/23F earnings.
  • While there is still some uncertainty on SATS’s recovery trajectory, we continue to like SATS as a key vaccine beneficiary given its pole position in an attractive market like Singapore and broader presence in the fast-growing Asia aviation market.
  • See
  • We think the current SATS's share price presents a good buying opportunity as it has fallen by 15.3% from its peak in mid- March, and is now trading at 21.6x FY23F earnings, which is only 0.5 standard deviation above its 10-year average (prior to COVID-19).

Jason SUM DBS Group Research | https://www.dbsvickers.com/ 2021-05-28
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