• Profit warning points to lower than expected earnings.
• SATS' 4QFY20 and 1QFY21F earnings to disappoint significantly due to low Changi throughput.
• Forecast losses for FY21F before recovery in FY22F.

SATS Management Guides for Up to 25% Y-o-y Earnings Decline for FY20F

• SATS (SGX:S58) has released management guidance for 4QFY20F and 1QFY21F. Due to COVID-19 and travel restrictions across the world, throughput and passenger arrivals at Changi have plummeted.
• SATS now expects 4QFY20 earnings to dive by 60-70% y-o-y and up to 25% in FY20F. 1QFY21F net loss guided to be S$50-70m: Including the government support scheme, 1QFY21F net loss is guided to be between S$50-70m, largely affected by a 95% drop in volumes of flights, passengers and meals.

Changi’s Throughput Has Plunged

• Both Singapore tourist arrivals and Changi’s passenger arrivals have declined dramatically from February 2020 by close to 90% y-o-y. This has a knock-on effect on SATS, whose primary source of revenue is derived from Changi Airport.
• In April, Changi also announced the closure of Terminal 2 for 18 months from 1 May 2020 till November 2021 to save costs due to poor air traffic and for upgrading works. We estimate Terminal 2’s annual capacity to be 20-25 million passengers and the closure is an indication of low throughput expected at Changi.

Sufficient Cash Resources

• SATS raised debt recently to shore up liquidity. It raised S$200,000 fixed notes on 31 March at 2.88% due 2025 and S$100,000 fixed notes on 24 April at 2.6% due 2025. Including other sources, aggregate debt funding amounted to S$500m for working capital, contingency cash reserve and strategic growth initiatives.

Estimate FY20F Net Profit to Decline by 22% Y-o-y and Anticipate a Slow Recovery

• Taking into account the profit guidance for 4QFY20 and 1QFY21, our previous estimates were too optimistic. Imputing 4QFY20 guidance, we now expect FY20F net profit to decline by 22% y-o-y. We do not believe the aviation sector would recover to normal operating level anytime soon.
• With 1Q21 net loss guidance of S$50- 70m being worse than expected and projecting a gradual quarterly improvement of net losses, our FY21F net loss is revised to S$136m. We anticipate a slow recovery with net profit of S$59.4m in FY22F.

Maintain FULLY VALUED With Lower Target Price of S$2.61

• Our Target Price is lowered to S$2.61 based on the average of DCF and PE methodology. Our DCF values SATS at S$3.89, factoring in a recovery over the longer term (WACC 5.7%, t=3%).
• Our PE component is pegged to 25x FY22F PE, in line with peers’ average, at S$1.33.
• Maintain FULLY VALUED as we anticipate slow recovery with losses in FY21F before turning profitable in FY22F.

Source: DBS Research - 5 May 2020