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Simons Trading Research

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

 

SATS - 1QFY21 Marginally Lower Than Guided Losses, But We Now Expect Losses for FY22 as Well; Downgrade to SELL

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  • SATS’ Singapore operations were in the black, aided by no-pay leave and JSS. However subsidiaries and associates were in the red, notably in China and India, due to limited scope for cost reductions.
  • We had previously assumed a faster recovery, but now expect continued losses in the next three quarters albeit at a slower rate. We also expect losses to continue into FY22, despite assuming a near 40% traffic recovery to pre-COVID-19 levels.

SATS' 1QFY21 (Apr 2020 to Jun 2020) Net Loss of S$43.7m, While Lower Than the Company’s Guidance, Is No Reason to be Optimistic

  • SATS (SGX:S58) had earlier guided that the loss would likely be at the lower range of guidance due to incremental revenue from the provision of services at the Marina Bay Cruise Centre for the temporary housing of foreign workers. That portion of revenue would be absent in subsequent quarters and thus gateway services revenue growth is likely to be more muted in coming quarters. Singapore operations were in the black for the period and we estimate losses from Malaysian subsidiary, GTR and Nanjing Weizhou would have pushed operating earnings into the red.
  • Negative operating cash flow (OCF) of S$62m for the quarter, and after factoring in lease payments, we estimate cash burn of S$69m for 1QFY21. OCF was also vastly lower than operating EBITDA of -S$2.5m, implying a reduction in working capital that could be due to grants or trade receivables. SATS also drew down S$256.5m in medium term notes, priced at 2.88% p.a.
  • 55% y-o-y decline in opex due mainly to lower staff costs, which fell 59% y-o-y while raw material costs were flat y-o-y due to the consolidation of Country Foods and a Chinese Food solutions subsidiary. 44.5% of the S$137m decline in staff costs was attributed to the Job Support Scheme (JSS) and other government grants - including grants from Japan. SATS indicated that a significant portion of its 13,100 staff were on no-pay leave.

Associate Losses Amount to 44% of PBT But 70% of Net Loss

  • Losses were underpinned by Chinese and Indian associates, which had limited ability to reduce staff overheads, due to strict labour laws. Notably the decline in revenue for China was the lowest by region, but losses were the highest, though there was a significant q-o-q reduction due partly to lower provisions.
  • Going forward, we believe that losses would be lowered but we do not expect a swift recovery as China has not removed restrictions on leisure international travel.
  • We estimate S$260m in JSS payout for FY21 and approximately S$20m in grants from Japan, which had announced ¥18,000 daily grants for employees of large corporations on no-pay leave for a period of 100 days. For the enhanced JSS, which was announced in August, we have assumed that SATS would recognise three months of JSS in 4QFY21 and the remainder in 1QFY22.

Do Not Expect a Significant Recovery

  • There are no signs of a recovery in international traffic and SATS’ key associates do not have the benefit of JSS. In Singapore, Country Foods had lowered operating margins since consolidation in Sep 19 and chances are that the unit will only be operating close to breakeven levels in FY21.
  • Even if traffic volumes were to increase, the extent of operating leverage is likely to be limited to just incremental meals, rather than higher flights handled as airlines will be focused on improving load factors.
  • Going into FY22, we have assumed that pax throughput at Changi would amount to 39% of pre-COVID-19 levels or rise 126% y-o-y. Even based on such assumptions, we expect SATS to remain in the red for FY22 due to a large reduction in JSS.

Factoring Losses Till FY22, We Do Not Expect Any Dividends Till FY23

  • SATS has taken on S$597m in debt and interest expense is expected to more than double in FY21. There is also the possibility that SATS might have to recapitalise its associates, which could lead to higher cash outflow.

SATS - Valuation & Recommendation

  • We lower our FY21 earnings estimate by S$193m, factoring in higher losses due to a delay in border openings. We have also lowered our FY22 earnings forecast by S$217m. Downgrade SATS to SELL.
  • We continue to value SATS on an EV/Invested Capital basis WACC but have lowered our ROIC assumption from 8.1% to 7.9% and have also raised our WACC assumption to 7.0% from 6.9%, factoring in higher risk premium. We have also lowered our sustainable growth rate assumption by 0.6ppt.
  • SATS share price catalyst: Announcement of a vaccine for COVID-19.

Source: UOB Kay Hian Research - 25 Aug 2020

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