SATS - DBS Research 2021-07-23: Banking On Vaccine-led Recovery

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

SATS - Banking On Vaccine-led Recovery

  • SATS's 1QFY22 core PATMI fell slightly short of expectations.
  • Increase in activity did not translate into sequential earnings improvement.
  • Cut FY22/23F net earnings by 37%/12% to reflect slower recovery in activity and thinner margins.
  • Maintain BUY on SATS with unchanged target price of S$4.50 as we roll forward our P/E peg to FY23F.

SATS's 1QFY22 results a modest miss; look beyond FY22F for recovery

1QFY22 core PATMI was slightly below our expectations.

  • SATS (SGX:S58)'s Core PATMI (including government reliefs) came in at S$6.4m (vs core losses after taxes and minority interests of S$43.7m in 1QFY21; -52% q-o-q), forming just 10% of our full-year projection. The underperformance during the quarter was largely driven by a modest sequential decline in the group’s top line (+31.6% y-o-y, -1.0% q-o-q) and margin erosion (EBIT margin of 1.3% in 1QFY22 vs 8.1% in 4QFY21) owing to lower government reliefs and rising raw material costs.

Revenue decreased slightly during the quarter despite an uptick in operational activity levels.

  • The number of flights handled rose by 4.0% q-o-q, supported by a rise in ‘cargo-only’ flights, while cargo revenue grew by 6.0% sequentially, underpinned by a 13.6% increase in cargo volumes processed during the quarter. Management shared that SATS’s cargo operations was running at 80% of pre-crisis levels during the quarter, and at 85% towards the end of the quarter. Number of gross meals produced surged by 11.9%, fueled by an increase in food distributed/sold via non-aviation channels, which mitigated a decline in the aviation food (in tandem with the 10% fall in passengers handled) and institutional catering segments. As such, SATS’s top line was essentially flat during the quarter due to unfavourable changes in its revenue mix (less aviation food).

Non-travel revenue continues to be a bright spot.

  • Non-travel revenue continues to be a bright spot, soaring by 22.6% y-o-y to S$127.6m in 1QFY22, and accounted for 46.3% of the group’s revenue during the period, primarily benefitting from the group’s diversification into non-aviation food channels (food contributed around 75% of non-travel revenue in the quarter). Management reiterated that they intend to grow this segment to offset the protracted turnaround in the travel segment.

Completed acquisition of 85% stake in a Thai Frozen Food Producer Food City for S$21m; more M&As on the horizon?

  • SATS plans to integrate Food City’s food production facilities in Thailand into its ecosystem to produce ready-to-eat meals, improve overall productivity and grow exports into regional markets. Management also reiterated that they are have plans to tap on their robust balance sheet (net cash position of S$222m) for M&A opportunities, and are currently evaluating candidates including cargo terminal operators in key cargo hubs and other central kitchens in the region.

Fine-tune earnings to reflect more gradual recovery in activity levels and thinner operating margins.

  • We are cutting our FY22/23F net profit estimates by 37% an 12% respectively to reflect a more gradual recovery in activity levels and thinner operating margins. We believe it may be difficult for SATS to grow revenues at a pace fast enough to temper tapering government grants and rising raw material costs over the next few quarters. Cargo volumes will remain resilient, but SATS appears to be experiencing some pricing pressures on this front (cargo revenue only rose by 6% even though volumes increased by 13.6%).
  • Singapore’s vaccine drive has been highly successful at 119 doses administered per 100 population as of 21-July, above the US and near the UK. Unfortunately, sluggish vaccination rollouts among developing economies in Asia, and the proliferation of the problematic Delta variant will constrain the turnaround in air passenger volumes in the region. However, earnings could surprise on the upside if SATS manages to complete earnings accretive acquisitions (not pencilled in for now).

Maintain BUY with unchanged target price of S$4.50.

Jason SUM DBS Group Research | https://www.dbsvickers.com/ 2021-07-23
SGX Stock Analyst Report BUY MAINTAIN BUY 4.500 SAME 4.500