Simons Trading Research

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


SATS - More Positive as Vaccine Develops

Author:   |    Publish date:

  • Moderna’s early data from its Phase 3 trial showed vaccine to be 94.5% effective.
  • We accelerate our recovery assumptions with faster than expected mass travel and normalisation kicking in.
  • Raised SATS's FY22-23F earnings forecast by 3-5%.

More Positive News on the Vaccine Front

  • Another of the current pool of Phase 3 trial candidates, Moderna Inc. in collaboration with the National Institute of Allergy and Infectious Diseases (NIAID), has announced positive initial trial observations. First interim analysis included 95 participants with confirmed cases of COVID-19, of which 90 cases of COVID-19 were observed in the placebo group versus 5 cases observed in their mRNA-1273 vaccine group, showed an efficacy of 94.5%.

Vaccine Could be Available as Early as 2020

  • According to Moderna, it intends to submit an Emergency Use Authorization (EUA) to the U.S. Food and Drug Administration (FDA) in the coming weeks. It anticipates having the FDA informed of the final safety and efficacy data (with a median duration of at least 2 months), with plans to submit applications for authorisations to global regulatory agencies.
  • Moderna expects to have approximately 20m doses of mRNA-1273 ready to ship in the USA by end-2020, and is on track to manufacture 500m-1bln doses globally in 2021.

Positive Vaccine Development Reinforces and Accelerates Our Recovery Outlook

  • This vaccine development comes soon after Pfizer/BioNTech’s announcement last week, which puts us on track for mass vaccine commercialisation in 2021. With two of 10 companies conducting Phase 3 trials having announced strong vaccine efficacy, there is now a higher probability of a vaccine commercialising next year, reinforcing our recovery assumptions.

Accelerating Our Recovery Assumptions

  • Both Moderna and Pfizer have plans to ship 20m and 50m doses by end-2020. If the vaccines are delivered this year, mass travel recovery could outperform our recovery assumptions by three months. In view of the current development presenting a higher probability of a vaccine being commercialised soon, we are now assuming an earlier mass travel recovery and normalisation at Changi.
  • As we have previously assumed that mass travel and earnings for SATS (SGX:S58) would reach normalised levels in 4Q22 (March 2022), this new vaccine development has led us to bring our assumption forward by three months to 3Q22 (Dec 2021). This results in an FY22-23F earnings revision of 3-5%.
  • We also lift our longer term Free Cashflow assumptions in our DCF valuation due to earnings normalisation being sooner than expected, resulting in higher DCF valuation in our Target Price computation.

Reiterate BUY on SATS, Target Price raised to S$4.50.

  • Our recommendation to accumulate SATS ahead of aviation recovery remains intact, with a stronger catalyst for recovery following this positive vaccine development. Having brought forward our FY22F recovery by one quarter, the more positive earnings outlook has led us to raise our SOTP-based Target Price to S$4.50.
  • Valuations remain compelling, with SATS trading at 20.7x FY23F PE, near average levels, and below -1 SD at 2.5x FY23F PB.
  • Catalyst for further earnings re-rating would be opening of more destinations for air bubbles. BUY for 14% upside including dividends.

Risk to Our View

  • Our investment thesis is premised around the assumption that a viable vaccine will be found in 2021 (FY22F), with air travel normalising in 2022 (FY23F). Our investment thesis, assumptions and forecast will be derailed, if a viable vaccine remains unavailable in 2021 (FY22F) or if number of flights decline due to re-tightening of border restrictions. Thus, our attempt to be ahead of the curve would prove to be way too early, since our anticipation of the launch of a viable vaccine in 2021 or further relaxation of travel restrictions are not taking place as anticipated.
  • Nonetheless, SATS has S$819m cash holdings on its balance sheet that will help it weather this crisis.

Source: DBS Research - 17 Nov 2020

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