• SATS'1Q20 earnings below, led by flat core revenue, lower operating.
• Lower margins due to fall in cargo revenue and consolidation of lower margin GTR business.
• Lowered FY20- 21F earnings by 5- 9%.
• Downgrade to HOLD, target price cut to S$5.00.

Downgrade to HOLD, Cut Target Price to S$5.00

• We downgrade SATS (SGX:S58) from BUY to HOLD with lower Target Price of S$5.00.
• Operating margin outlook is less optimistic on weak cargo volumes and consolidation of lower margin Ground Team Red (GTR)’s financials. We lower our earnings forecasts by 5-9% to reflect less optimistic operating margins, thus reducing our earnings growth to 2-3%, and Target Price to S$5.00.
• SATS now trades at 23.3x FY20F earnings or +1SD of its historical mean. With limited upside for the stock, we downgrade our recommendation to HOLD.

Where We Differ

• We are now on the going forward, led by a weak cargo outlook and consolidation of lower margin GTR operations.

Potential Catalyst

• Catalysts for the stock include:
  1. margin improvement in GTR;
  2. freeing up of financial resources from the Turkish Airlines MOU to pursue other deals and to pay out more dividends; and
  3. faster-than-expected ramp-up of Terminal 4.

What's New - Less Optimistic Margin Outlook

1Q20 earnings below led by flat core revenue, lower margins:

• SATS' 1Q20 Ground Team Red Holdings Sdn Bhd and Ground Team Red Sdn Bhd (which helped lift 5m) from 1 January 2019.
• Operating margins disappointed (12.2%, -2.6ppt), which led to earnings disappointment. Operating profit was below our estimate at S$56.8m (-12.5% y-o-y), and contribution from associates/JV income was lower as well.

Core revenue flat:

• Although headline Team Red, core revenue would have been flat at S$442m (+0.6% y-o-y).
• The quarter saw a drop in cargo revenue (452,000 tonnes handled, -1.7% y-o-y), in line with softening global economy and loss of flights from Jet Airways. This was offset by higher Singapore passenger numbers, an increase in meals served by TFK and underlying growth in Singapore operations.

Lower margin:

• Operating Airways after the India-based airline Jet all of its flights including international sectors in April as it failed to raise fresh funds to continue operations.
• Margins were further exacerbated by the consolidation of GTR, which has lower margins. Staff count grew by 27% y-o-y to 16,700 largely due to GTR’s headcount.

Lower associates/JV income led by gateway:

• Associate/JV income fell by 4.6% y-o-y to S$14.6m, partially affected by lower cargo volumes across some entities as well as Jet Airways’ suspension. Excluding India which recorded provision of S$3.3m relating to Jet Airways, associates/JV contribution would have grown by 17% y-o-y.
• China also saw start-up costs at Daxing Airport which is due to open in October. Food associates remained flat.

Downgrade to HOLD, Lower Target Price of S$5.00

• 1Q20 in Cargo and GTR. While we forecasts, we have lowered our operating margin assumptions, due to weaker Cargo, lower margins from GTR, and higher staff.
• Our lower S$5.00 Target Price is derived from a capital and 3% assumption).
• SATS is now trading at +1SD of its historical mean PE with earnings growth lowered to 2-3%. With attractive upside, we downgrade the stock to HOLD.

Source: DBS Research - 19 Jul 2019