1Q20 Missed Due to Many One-offs

• SATS LTD. (SGX:S58)' 1Q20 reported PATMI of SGD54.7m missed our and consensus estimates by c12-15%. That said, most of the factors responsible for the miss are temporary in our view and should mend in coming quarters, and underlying core PATMI of SGD58.5 was just a shade below our expectation accounting for c22% of FY20E.
• While Singapore fell, Japan and ASEAN ex-SG associates/JVs grew better than expected.
• Our BUY and DCF-based Target Price (WACC 6.8%; TGR 2%) of SGD6.10 are unchanged.

Cargo, Jet Air and That Boeing Issue Mainly to Blame

• The cargo market was soft affecting SATS gateway revenue growth which, nonetheless, managed to deliver a flat y-o-y performance, excluding the effect of GTR consolidation. Visibility on this market is expectedly low and dependent on the medium-term outcome of the US-China trade war. Other key factors responsible for the profit miss are more transient in nature we believe:
  1. the suspension of Jet Airways operations leading to loss of revenues and receivable write-downs; and
  2. the recent temporary suspension of Boeing’s 737 MAX aircraft.
• In addition, 1Q20 also has upfront costs for starting operations at Beijing’s new Daxing International Airport later this year.

Japan and PT JAS on the Mend

• TFK Japan posted 8% y-o-y revenue growth in the quarter and our outlook is for continued strength, driven by traffic growth leading up to the 2020 Tokyo Summer Olympics.
• PT JAS, one of the key associate/JV profit contributors, also saw a recovery as the concession cost increases of three quarters ago are now beginning to get gradually priced-through.

Investments and Capex to Materially Ramp Up

• At its Capital Markets Day in June, SATS guided for a three-recent years. It aims to:
  1. increase share in a consolidating APAC aviation catering and cargo market;
  2. become a leading central kitchen supplier in specific APAC markets; and
  3. develop a presence in travel retail.
• Some of these gestation periods but the impact to medium-to-long c25-30% of SATS’ FY20E PATMI.

Our Key Comments From the Analyst Briefing Info

Jet Airways’ situation:

• SATS’ revenue was impacted when the carrier operate around 9 flights/day for SATS services. Management stated up the freed landing slots at Changi Airport with Vistara and having secured a few.

737MAX situation:

• The US FAA grounded two crashes. This led to many airlines having to cut aircraft. The market volume will eventually adjust back we believe, but this could take a few months more.

The ‘real’ 1Q20 core PATMI:

• Our SGD58.5m core PATMI takes into account the one-off charges and losses but not the loss of business from Jet Airways and 737MAX groundings. SATS estimates this to be a into account all of these factors, if not for the above events, the ‘real’ core PATMI would have been flattish y-o-y for 1Q20 despite the weak trade-related cargo market.

Source: Maybank Kim Eng Research - 19 Jul 2019