Simons Trading Research

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


SATS - Strong Operating Leverage From Cargo

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  • SATS's 2QFY21 reported net loss of S$33.2m included S$31.6m impairment of investment. Excluding this, S$1.6m loss beat our forecast of -S$38m.
  • Outperformance was due to better operating leverage at its gateway services segment as well as higher government relief (+16m q-o-q, +26% q-o-q).
  • Ability to handle/store COVID-19 vaccine in its cold chain could be a catalyst. SATS's current valuation of 25x FY23F has priced in two years of recovery. Re-iterate HOLD.

SATS' EBIT Breakeven Helped by Cargo Resilience, Grants and Cost Control

  • SATS (SGX:S58)'s 2QFY21 (Jul to Sep 2020) reported net loss of S$33.2m included S$31.6m impairment of investment in an associate and a long-term investment. Excluding this, core net loss of S$1.6m beat our loss estimate of S$38m. SATS broke even at EBIT level.
  • Staff costs reduced 7% q-o-q to S$89.5m with the help of higher government grants of S$77.9m (26% q-o-q), comprising training rebates, worker levy relief and the Job Support Scheme (JSS). SATS will recognise the extended JSS till Jun 21, while other reliefs could taper off slightly in the coming quarters. Rightsizing and cost-control efforts continued as headcount reduced by 500 to 13k in 2QFY21.
  • With the Singapore government relief, SATS’s Singapore operations was the only profitable outfit; its Japan operations reported a quarterly loss of S$5.3m.

Cargo strength extended to associates; sustainable near term

  • Losses from associates and JVs reduced by 59% q-o-q to S$12.8m in 2QFY21 (vs. our expected S$28m loss). Gateway associates turned in a 91% q-o-q improvement, with losses narrowed from S$18.3m in 1QFY21 to S$1.7m in 2QFY21. In line with Changi’s freight movement, which improved 17% q-o-q in the quarter, similar positive trend were seen across SATS’s associates/JVs across India, Indonesia and Hong Kong. This positive trend is likely to continue in 3QFY21, the seasonal peak period.

Pharmaceutical cargo growth thanks to cold chain ability

  • SATS has seen a 15% y-o-y increase in pharmaceutical cargo throughput by weight in Singapore from Jan-Jul 2020. Overall perishables and pharma handling account for 30% of its cargo tonnage.
  • Management alluded that SATS facilities are equipped to handle COVID-19 vaccine storage at -70 degree Celsius. SATS Coolport Singapore has an annual capacity of 250k tonnes, with 18 temperature-controlled cold rooms. Other cargo terminal in the region that are pharma-certified include Beijing Aviation Ground Services in Beijing, Transom SATS Cargo in Muscat and AISATS Coolport in Bangalore.

SATS Coolport Singapore

  • SATS Coolport Singapore is a purpose-built airfreight terminal that is equipped with electronic temperature monitoring technology and cold rooms with various temperature settings to handle commodities with different temperature requirements. It has an annual capacity of 250k tonnes, but it achieved 300k in 2019. On-tarmac coolers are also available to protect temperature-sensitive cargo when it is transported between flights. Yield for perishables and pharmaceuticals are higher as the fees for cold-room cargo is 3x that of general cargo.

Valuations 2 Years Ahead of Fundamentals. Re-iterate HOLD

  • We roll forward our Target Price to FY22F, now on a long-term mean of 2.5x P/BV (previously 10% above -0.5 s.d. of mean) as we think SATS could be gradually trading back to its historical mean as the worst seems to be over.
  • Post the Pfizer/BioNtech vaccine news, SATS share price has risen by 18%, trading at 26x FY23F P/E (+2 s.d. of its 5-year mean) and 3.2x FY23F P/BV (its 5-year mean), indicating that investors are expecting an ROE normalisation of 14%, leaving no room for disappointment, in our view.
  • We believe the downside risk for SATS is limited, but the speed of its recovery still depends on the relaxation of travel restrictions. We have factored in a revenue recovery to 70% of pre-Covid levels by FY22F and 80% for its associates.
  • Downside risks: slower-than-expected recovery of aviation traffic and pricing pressure from airlines.
  • Upside risks: earnings accretive sizeable M&A and faster-than-expected recovery of global travel.

Source: CGS-CIMB Research - 13 Nov 2020

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