• SATS' 1Q21 net losses (-S$43.7m) were wider than our -S$30m, forming 50%/69% of our and consensus FY21F. Revenue and associates were the key misses.
• Staff costs declined 59% y-o-y and 44% q-o-q thanks to government grants in Singapore and Japan, 19% y-o-y cut in staff strength as well salary cuts.
• SATS is the worst performing stock among the large cap FSSTI stocks. This could have priced in the structural challenges.

Whole Region Made Losses Except Singapore

• 1Q21 net losses (-S$43.7m) were in line with SATS (SGX:S58)’s guidance of “narrower than S$50m-70m” but missed our more hopeful -S$30m.
• Food solutions revenue remained flat at S$97m (-3.5% q-o-q, +73% y-o-y mainly due to consolidation of Country Foods). Non-aviation/aviation revenue split stood at 46%/53% relative to historical average of 15%/85% and is likely to remain so in the coming quarters as recovery in aviation takes a back seat.
• Japan (TFK) revenue was down by 80% y-o-y and 75% q-o-q to S$13m contributing only 6% to group. Accordingly, Japan’s losses widened to S$5.7m (4Q20: S$2.7m).
• By region, China (-S$18m) and Asean (-S$11m) contributed to most of SATS losses. Singapore turned in an S$4m profit (4Q20: S$43m).

EBITDA Losses But Could Improve Sequentially

• Opex was down to S$245m (-40% y-o-y, -37% q-o-q) with staff costs declining by 59% y-o-y and 44% q-o-q to S$96.5m vs. historical S$220m/quarter thanks to S$61.7m of government grant from Singapore and Japanese governments. But this was not sufficient to offset the weaker revenue and caused SATS to turn in its first EBITDA loss of S$3m and EBIT loss of S$36m.
• We believe this could be the worst quarter due to improving cargo volume, heading into peak season (Sep-Dec) as well as better freight rates on the back of stronger demand for perishable and medical supplies.
• We factored in sequential recovery in revenue of 5% in 2QFY21F and 15% in 3QFY21F. For 4Q21F (Jan-Mar 21), we assume overall capacity to beat 50% of pre-Covid. However, we cut our FY21-23F EPS by 2-29% to reflect weaker-than-expected associates and slower recovery in aviation sector in general.

Upgrade SATS to HOLD With a Higher Target Price of S$3.00

• We upgrade SATS from Reduce to HOLD due to as we think the worst could be over for SATS’ bottomline and the stock can be seen as a recovery play for long-term investors. Cash balance was S$723.5m as of 1Q21 with minimal capex (S$60m-70m) expected in FY21F.
• SATS is the worst performing stock (c.-40% YTD) among the large cap FSSTI stocks.
• Our Target Price is still based on 2.1x FY21F P/BV or 10% above -0.5 s.d. of long term mean. On a P/E basis, it is still not cheap versus long term mean.
• Downside risk: full blown resurgence of COVID-19. Upside risk: vaccine availability.

Source: CGS-CIMB Research - 24 Aug 2020