• SATS's 4QFY20 earnings in line, decline led by slower Changi throughput on regional travel restrictions.
• No final dividend declared.
• Awaiting discretionary mass travel to take off.
• Maintain HOLD, Target Price slightly higher at S$2.83.

SATS 4Q20 Earnings in Line

Decline led by lower Changi throughput:

• SATS (SGX:S58)'s Core 4QFY20 earnings of S$13.7m was in line with our forecast. Revenue declined by 8.1% y-o-y to S$433m led by lower Changi throughput. Tourist arrivals and Changi arrivals have fallen by up to 70-80% y-o-y in March 2020.
• Gateway revenue declined by 17.8% y-o-y to S$185.3m. TFK in Japan declined by 16.5% y-o-y to S$50.5m. Non-Aviation food business increased by 50.3% y-o-y to S$100.4m due to S$50m consolidation of Country Foods and Nanjing Weizhou Airline Food Crop.
• Stripping out the consolidation impact, non-aviation revenue would have declined by 24.6% y-o-y to S$50.4m. Headline revenue would thus have declined by 18.6% to S$383.1m.

Operating margins lower due to revenue decline:

• SATS's operating margins came in at 9.6%, lower than 10-12% in 4Q19 and 3Q19, due to the inability to defray the impact of lower revenue on the fixed cost components in staff costs, depreciation and from the Cargo business. Government grants recognised amounted to S$21.9m for the months of February and March.

Losses from Associates/JV:

• SATS's associates/JV losses amounted to S$31.2m, with losses of S$33.6m for Gateway and S$6.5m for Food. The lower contribution was due to a combination of lower business volumes, impairments, credit losses and asset impairments. The largest contributor to the decline came from Greater China associates.

No Final Dividend Declared

• SATS's FY20 full year dividend was 6 Scts, which was declared in FY20’s interim. This is a prudent response to the weak and uncertain operating environment.
• Dividends can be expected to resume when flights and passenger volumes improve. We have lowered our SATS's FY21 dividend forecast to 0 Scts while imputing a small DPS assumption of 3 Scts in FY22F. There is hence no dividend support for FY21F.

Low Visibility for Mass Travel Recovery

• While there are flights resuming operations, Terminals 2 and 4 remain closed. With the lower passenger throughput at Changi, SATS is also operating only one flight kitchen at Changi. For now, even though there is some progress made to facilitate business travel and airlines are resuming flights, we believe passenger throughput at Changi will remain muted for as long as discretionary mass travel does not return. Visibility for this remains low for now.
• Signs of recovery will include increased flights and passenger traffic at Changi, reopening of closed terminals, and reopening of the closed flight kitchens to accommodate improving air traffic.

Maintain HOLD for SATS With Slightly Higher Target Price of S$2.83

• SATS's 4Q20 results is a non-event in our view, as the full-blown impact of poor throughput at Changi was felt in 1Q21 (April to June 2020) due to regional lockdowns. Management has guided that 1Q21 earnings would come in better than its earlier S$50m loss guidance due to better cost management. We hence raise FY21-22F earnings by 6-8% to reflect better cost management and consolidation impact of Country Foods and Nanjing Weizhou Airline Food Crop, which would help to support non-aviation revenue in markets such as China.
• Our recommendation is unchanged at HOLD while we have raised Target Price slightly to S$2.83 in line with earnings revision.
• Where we differ. Our estimates are below consensus as we factor in a slower recovery of the aviation sector from the COVID-19 outbreak.

Source: DBS Research - 13 Jul 2020