• SATS share price took a year during GFC to normalise to 15x forward P/E then. It now trades at 30x FY22F P/E, implies a sharp recovery.
• Our base case assumes SATS (SGX:S58) returns to profitability in 4QFY21F (Jan-Mar 21), at the earliest, given the magnitude of global lockdown.
• We expect a loss of S$101m for FY21F and a profit of S$119m for FY22F (48% lower than FY19). Dividend yield (if any) at 2%. Maintain Reduce.

Daily Departures in Asia Pacific Deteriorated 90% in Mar 20

• As lockdowns heightened, global flight departures are only at 2,071/day now or 7% of where we were in the beginning of Mar of 28,715. Similarly, daily departures in Asia Pacific fell 90% to 453 flights (from 4,447).
• Corresponding to the quiet aviation sector, Singapore Changi Airport will suspend Terminal 2 (28m passengers handling capacity) from 1 May 2020 for 18 months to expedite the expansion works. This reduces Singapore’s overall passengers handling capacity by 30%.
• Operations at Terminal 4 (7m passengers, 9% of overall capacity) have also been scaled down as key airlines such as Cathay Pacific and Air Asia slashed capacity. We do not rule out further closure of T4.

Four Consecutive Quarters of Operating Losses

• We factor revenue from aviation to be operating at sub-optimal capacity of 30%/10%/20%/25%/50% for the period of Jan 2020 to Mar 2021 (4Q20F to 4Q21F). We keep the non-aviation revenue from Singapore Food Industries and Country Foods of S$160m/quarter.
• We built in a reduction of 15-30% per quarter for staff costs starting 4Q20F. We have also factored in S$51m per quarter of job support scheme grant from Singapore government for its 10k aviation-related staff. Even with these, we still expect four quarters of EBIT losses from 4Q20F to 3Q21F (S$44m/S$79m/S$57m/S$27m).
• Our EPS for FY20F-22F are cut by 28-148% accordingly.

Regional Operations Not Spared, Gateway Offers Some Lifeline

• We estimate SATS’ TKF to dip into losses after MI of S$12m-15m for FY21F with similar high operating costs structure as Singapore. JAL’s passengers’ traffic declined 26% m-o-m in Feb and we expect this to worsen, especially after the 1-month state of emergency declared effective 7 Apr. Start-up costs in TFK’s newly expanded kitchen in Haneda also adds on to losses.
• We slashed our associates profit contribution by 54% for FY21F to S$26m factoring reduced capacity across India, Indonesia, Taiwan, Hong Kong and China. Freight operations are less affected vs. inflight catering.

No Cash Crunch But No Longer Net Cash, Dividend Cut Inevitable

• We estimate SATS’ cash burn rate of S$14m/S$48m/S$26m in 4Q20F/1Q21F/2Q21F (EBIT less depreciation) from Jan to Sep 2020. The cash balance of S$212m (end Dec 19) and recently issued S$200m bonds should suffice but swung long term net cash into net gearing of 2-4% in FY21F-22F, implicating historical 80% dividend payout.

Source: CGS-CIMB Research - 10 Apr 2020