• YTD SATS share price outperformance narrows total returns to 5%. Downgrade to HOLD from Add with an unchanged Target Price of S$5.40 (21.9x CY20 P/E).
• SATS share price trades at +1 s.d. of mean. We would look to accumulate at about < S$5.00 or upon sizeable earnings accretive M&As announcement.
• SATS’ 1QFY3/20 net profit of S$55m was slightly below our S$60m forecast, dented by higher depreciation from SFRS 16 and the Jet Airways grounding.

Revenue in Line, Negative Jaw From Higher Expenses

• SATS LTD. (SGX:S58)’s 1QFY3/20 net profit of S$54.7m formed 21% of our and consensus’ full-year expectations. Total revenue of S$465m (+11% y-o-y) was broadly in line, at 24% of our FY20F.
• The key variance came from higher depreciation with the adoption of SFRS 16 which resulted in recognition of right-of-use assets and higher ‘other costs’ due to maintenance for ground support equipment & vehicles, IT expenses, fuel costs and etc. This is offset by lower-than-expected raw material costs from better yield.

Gateway Steady Weaker

• Revenue for Gateway was up 12% y-o-y thanks to the consolidation of passenger movements at Changi.
• Underlying flights and passengers handled continued to grow 1-2% q-o-q and y-o-y. However, weaker freight volume and consolidation of GTR (lower EBIT margin of 8.9%) as well as higher expenses mentioned above dragged down overall margin to 12.2% (FY19: 13.5%).

Food Not Pressured, Japan

• In contrast to some SIA contract renewal since 1 Apr, revenue from Singapore food solutions stood.
• Japan TFK revenue grew 8% y-o-y to S$66m. We expect stronger growth in 2020, riding on the Olympics.

Jet Indonesia Earnings

• SATS made a full provision of S$3.3m for associates with the grounding of Jet Airways. Additional income loss from Jet Airways were $3m due to the loss of 500 flights in 1Q20.
• On a positive note, Jet’s 9 inbound flights/day to Singapore will be filled by Vistara (2 flts) and Indigo (1 flt), and more airlines taking up the excess capacity, reducing the income loss in the quarters ahead.
• Share of associates/JV profits of S$14.6m was above our S$10m on improved earnings from PT CAS concession fee pass-through to customers.

Macro Environment Caps Premium Valuation

• SATS is trading at 22x CY20F P/E or +1 s.d. of mean since 2006. Impending macro weakness may put pressure on traveling demand.
• Sizeable M&A is a re-rating catalyst while a sudden plunge in aviation trend is a key risk.

Source: CGS-CIMB Research - 19 Jul 2019