• SATS (SGX:S58)’s 3QFY3/20 core net profit of S$59m was in line with our expected S$60m on seasonal strength, with revenue up by 9.7% q-o-q to S$546m.
• SATS’s Singapore revenue could drop by 30% y-o-y in CY20 using STB’s guide, while China could volume down by 40% y-o-y in the aviation space.
• Our previous FY20F DPS S$0.19 is likely to be at risk given the uncertain outlook, in our view.
• Maintain REDUCE on near-term headwinds.

Revenue Grew 18% Y-o-y, Margin Dipped 2.5bps

• SATS's 9MFY20 net profit of S$174m formed 86% of our full-year forecast and 77% of consensus’. We consider this set of results in-line as we forecast a -50% q-o-q in earnings in 4QFY20F.
• Overall revenue grew 18% y-o-y and 9.7% q-o-q to S$546m, driven by seasonal strength as well as the consolidation of GTR and Country Foods. Revenue from gateway was up 11% y-o-y and 4% q-o-q to S$234m and food solutions up by 23% y-o-y and 15% q-o-q to S$311m.
• Japan revenue was flat q-o-q at S$68m (+11% y-o-y) thanks to the completion of Haneda’s kitchen expansion and more slots given by airlines. However there could be downside risks in the coming quarter as Chinese visitors accounted for 30% of 2019 tourist numbers in Japan.
• SATS’s 3QFY20 EBIT margin dipped to 11.5% (3QFY19:14.1%) mainly due to the consolidation of the two entities mentioned above.

Consequential Impact From Covid-19 (STB: -30% Y-o-y in 2020)

• SATS takes its cue from the Singapore Tourism Board (STB) that tourist numbers could fall by 30% in 2020; its Singapore revenue could be similarly impacted.
• SATS has seen a harder hit in its Chinese aviation operations as volume was down by 40% y-o-y in Feb 20. In Feb, SIA mainline cut its ASK capacity to China by 47%, while SilkAir cut its China ASK by 44%. Scoot has also cut its Feb-Mar capacity to China by 90%, excluding ad-hoc cuts for HK and Macau. This represents some 45% of Scoot’s medium/long-haul ASK.
• SATS expects to see some relief by the Singapore government in the upcoming Budget on 18 Feb. During SARS, it received wage credit, a tax concession and expenses relief. We expect its EBIT margin to plunge to 8-10% in the next two quarters.

PT Cas and Brahims Held Associates’ Profit Firm

• Despite S$2m-3m start-up costs at Daxing airport, contribution from gateway associates were flat q-o-q at S$10.4m, driven by PT CAS, offsetting the weak cargo volume in Mumbai and Hong Kong. Contribution from food solutions associates was up 43% q-o-q to S$4.3m, with improvements in Brahims.
• We believe overall performance in associates may not be spared ahead given the contagion virus impact regionally.

Maintain REDUCE

• Management did not comment on dividend outlook. We cut our DPS to S$0.16 (from S$0.19) on 87% dividend payout ratio (FY19: 85%). Our Target Price of SGD4.07 is based on 0.5 s.d. of 6-year mean.
• Upside risks: huge government relief and faster-than-expected containment of the Covid-19 outbreak.

Source: CGS-CIMB Research - 13 Feb 2020