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Simons Trading Research

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

 

SATS - Benefit From Government’s Wage Support & Capital Infusion Into SIA; Upgrade to BUY

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  • Relief measures aimed at the aviation sector should lead to an estimated cost savings of S$35m for SATS (SGX:S58) in FY21. More importantly, SATS’ key customer will be thrown a lifeline and this will reduce SATS’ risk profile.
  • We estimate flight movements at Changi will dive 92% y-o-y in 1QFY21 and then gradually improve. If so, SATS could still be profitable in FY21.
  • Upgrade to BUY. Target price: S$3.96.

What’s New

Singapore government shares wage cost burden.

  • Singapore’s Deputy Prime Minister announced that companies in the aviation and the cruise sectors will receive 75% wage cost support for up to S$4600 per month until Dec 20. Assuming 80% of SATS’ employees are based in Singapore and are directly involved in Singapore’s gateway services and catering and cruise businesses, SATS could save about S$35m, or 3.8% of FY20 estimated staff cost.
  • For FY21, we assume a 15% decline in wage cost vs a 21% decline in revenue.

SATS could still be profitable in FY21 if travel disruptions remain in place in Apr- Jun 20 quarter and gradually lifted in the following quarter.

  • We have assumed flight movements and pax throughput at Changi decline 30% y-o-y in FY21. Gateway services revenue consists of flights handled, cargo handled, pax handled and cruise operations. Cruise operation is likely to fare the worst, followed by pax and flights handled. Cargo operation should be less impacted due to greater freighter operations.
  • We estimate SATS' net profit to decline 70% y-o-y in FY21.

Food solutions would be less impacted because of the acquisition of SATS BRF in Sep 20.

  • SATS BRF distributes frozen meat and halal food to local and international retailers. We believe demand would not be adversely impacted by COVID-19. Meanwhile, inflight catering revenue out of Singapore, Japan and China is estimated to decline 34% y-o-y in FY21.

Cargo and cruise businesses have higher fixed costs; while margins are likely to decline sharply, cash flow should be less impacted.

  • Apron and pax handling are more labour intensive and thus could impact margins more unless labour cost is reduced proportionately.

Stock Impact

Key customer, SIA, is deemed a critical asset and too big to fail.

  • Singapore Airlines (SGX:C6L)’s liquidity is likely to be shored up and with that, SATS’ operational risk will be lowered significantly. Singapore Airlines accounts for 30% of SATS’ revenue.

Upgrade to BUY with a lower target price of S$3.96 (previously S$4.80).

  • A stock’s intrinsic valuation is based on its long-term free cash flow. A year’s decline in earnings should not have a substantial impact on fair value, particularly if the company is not highly leveraged. Still, SATS’ exposure to the highly volatile aviation sector has raised its risk profile. We thus raise our WACC assumption from 6.0% to 6.9%, factoring in higher risk premia and higher beta.

Earnings Revision / Risk

  • We lower our FY20 net profit forecast by 14% to S$183m, implying an 83% y-o-y decline in 4QFY20 net profit. We also slash our FY21 net profit forecast by 75%.

Valuation / Recommendation

  • Upgrade to BUY. At our target price, SATS would trade at 19.4x FY22F PE, vs its 5-year mean PE of 20.4x.

Share Price Catalyst

  • Reduction in rate of COVID-19 infections and removal of flight restrictions from Jul 20.

Source: UOB Kay Hian Research - 27 Mar 2020

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