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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 14 Jan 2021, 9:32 AM

 

SATS - Recovery Could Take Longer

Author:   |    Publish date:


  • COVID-19 pandemic could be worse than expected with more travel restrictions imposed globally.
  • More bearish on earnings following curbs in global travel demand.
  • Cut SATS (SGX:S58)'s FY21-22F earnings forecast by a further 23-25%.

COVID-19 Situation Worsens With More Travel Restrictions

Share price declined on worsening COVID-19 situation:

  • Since our last note SATS - DBS Research 2020-02-14: Brace For Impact Of COVID-19, SATS Share Price has fallen by more than 30% from S$4.54 to S$3.12 as the COVID-19 situation worsens globally.
  • The number of new cases in Europe has escalated to over 60,000 since. The number of globally confirmed cases is now about 4 times the number of confirmed cases on 13 February.

More travel restrictions in place globally to address imported cases:

  • With the number of confirmed cases escalating rapidly especially in Italy (27,980 on 17 March), countries have either imposed or tightened up travel restrictions. To prevent imported cases, countries globally have chosen to implement a combination of the following measures – closing borders, restricting specific or all visitors from entering, requiring quarantine, banning specific flights into their countries.

Tighter travel restrictions at Changi since 1 Feb:

  • Singapore first imposed travel restrictions on all mainland Chinese passport holders and all foreigners who have been to China within the previous 14 days, from entering into or transiting through Singapore from 11:59pm on Saturday, February 1. This has now been extended to include passengers who have been to France, Germany, Iran, Italy, Korea (Rep.) or Spain in the last 14 days. In addition, from 11:59pm on 16 March, all travellers entering Singapore with recent travel history to Association of Southeast Asian Nations (ASEAN) countries, Japan, Switzerland or the United Kingdom within the last 14 days will be issued with a 14-day Stay-Home Notice (SHN).

Expect Regional Travel to Weaken Further From Our Initial Projections

  • We expect Changi’s passenger arrivals to weaken further: We are expecting tourist arrivals to drop off following recent weeks’ events on the COVID-19 outbreak. The Singapore Tourism Board (STB) is already expecting visitor arrivals this year to fall by about 25 to 30 per cent. This works out to an annual 2.1m arrivals this year, compared to 3m passengers recorded for the entire 2019.
  • Given that this situation has further escalated, we believe there are downside risks and tourists arrivals will weaken further underperform our initial projections.

Travel restrictions into Japan:

  • Japan has also implemented entry restrictions barring visitors who have been to the following places in the past 14 days – Hubei Province or Zhejiang Province (People's Republic of China), Cheongdo County or Daegu City in Korea (Rep), Gyeongsan-si, Andong-si , Yeongcheon-si, Chilgok-gun, Uiseong-gun, Seongju-gun or Gunwi-gun in Gyeongsangbuk-do in Korea (Rep.), the provinces of Alborz, Gilan, Golestan, Isfahan, Lorestan, Markazi, Mazandaran, Qazvin, Qom, Semnan or Tehran in Iran, San Marino or Emilia-Romagna, Lombardy, Marche, Piedmont or Veneto in Italy.
  • SATS has about 14% revenue contribution from Haneda and Narita airports, both of which are the key contributors to Japan’s revenue. We expect arrivals to Japan to fall off from our initial assumptions as well.

Weakness in regional travel to impact associates’ income:

  • Associates’ income contributed about 19% to SATS’ FY19 profit before tax. Key associates are PT Cardig Aero Services (CAS), PT Jasa Angkasa Semesta (JAS), Asia Airfreight Terminal (AAT), and Evergreen Sky Catering Corporation (ESCC) operating in Taiwan, Indonesia and Hong Kong. Other associates are operating in Malaysia, Philippines, China and India airports. We expect downside risks to our initial assumptions as well.

Cut FY21-22F Earnings Forecast by 23-25%

Factoring in longer than expected recovery.

  • We expect the global fight against COVID-19 to be longer than expected and are lowering our earnings forecasts to reflect further loss of revenue from a more muted regional air travel outlook over a slightly longer time frame. We forecast a FY21F revenue decline of 9.9% y-o-y, lengthening our initial assumption of one to two months of weak passenger arrivals from April 2020 (start of FY21F).
  • Our operating margins are lower given that operating expenses (opex) are largely fixed. Along with lower associates/joint venture (JV) contribution, we expect earnings to decline by 20% y-o-y in FY21F before recovering in FY22F.
  • The downside risk to our forecast would be a prolonged COVID-19 situation which subdues travel demand. In comparison, FY04 earnings declined by 15% on the back of the severe acute respiratory syndrom (SARS) while during the GFC earnings declined by 25%.

Worst-case share price of S$2.07 at average valuation of 13.5x:

  • Based on a 19-year price-to-earnings (PE) band, the PE valuation corrected by about 3 SD (standard deviation) during the GFC and was not impacted during SARS in 2003. A share price drop of a similar magnitude would base out at average valuations of -1 SD at 13.5x FY21F PE, working out to S$2.07 and a dividend yield of 6.3%.
  •  

Downgrade to FULLY VALUED With Lower S$2.66 Target Price

  • We remain neutral on the stock as we factor in further negative impact of Changi and regional travel into our forecasts. Our Target Price is S$2.66, derived from a blended valuation framework using 15.8x (pegged to -0.5 SD of its 14-year mean from 22x previously to account for higher risk of COVID-19) FY21F PE and DCF (7.3% weighted average cost of capital and 3% terminal growth assumption).
  • We also lowered our DPS projection since it has cut DPS and payout ratio before in 2009’s GFC and that it requires cash resources for its expansion plans going forward.
  • Downgrade to FULLY VALUED until there is further visibility on the earnings recovery in the aviation market.

Source: DBS Research - 19 Mar 2020

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