• We hosted a conference call for SATS's management with investors. Key discussion points included pace of aviation recovery and new growth areas.
• We think SATS could be viewed as a recovery proxy but the pace of bilateral green lanes between Singapore and other countries being set up is key.

How Fast Is the Recovery?

• SATS (SGX:S58) is still using IATA’s forecast that air traffic will not recover till 2024F as a general guideline. However, it believes its operations linked to domestic travelling (China, Japan) and cargo handling (Indonesia, HK) could see relative faster recovery.
• In Singapore, the government has established essential bilateral green lanes with several countries; this could expedite the rebound in Changi’s traffic. The pax movement in Changi rose 78% m-o-m to 86k in Jul, but still a far cry from pre-Covid levels, at -98.5% y-o-y. Flights handled in Jul were up 10% m-o-m to 5.25k (-83.8% y-o-y). However, we think the pace of recovery could still be slow with only essential travel green lanes being established.
• The latest agreements with South Korea, New Zealand and Brunei only account for 4% of total international visitors into Singapore, based on Singapore Tourism Board's 2019 data. We think recovery is only meaningful if green lanes include discretionary travel, especially from China (c.19% of total Singapore visitors volume in 2019) and Indonesia (16%).

SATS Could Take on Health Check Role

• SATS is working with the government to safely increase the volume of passengers from countries where the infection rates are relatively low, and designing transit procedures to prevent cross infections. This includes streamlining medical certifications for the travellers to minimise paperwork. We believe pre-travel swab tests could be a structural new norm, a role which SATS could take on in the near future with the right training and equipment.

Resilience in Cargo

• In Jul, SATS's cargo volume rose 7% m-o-m (-30% y-o-y) to 119k tonnes in Changi, and 4% m-o-m (-7% y-o-y) to 369k tonnes in HK; India's rose 71% m-o-m in Jun to 163k tonnes (-41% y-o-y).
• Shift towards perishables and pharmaceuticals also benefit SATS as airlines collect higher yields from these segments. Its fees for coldroom cargo for perishables is 3x that of general cargo. This segment currently accounts for 30% of its cargo tonnage.

Sufficient Cash; There Are Value M&As Opportunities

• SATS incurred S$71.5m negative free cash flow in 1Q21 (net of S$61.m in government grants) but remained in a slight net cash position. Cash & cash equivalent stood at S$723.5m at end-1Q21. We believe with cost under control, SATS is ready to execute its M&A strategy as soon as recovery is in sight. In particular, it mentioned that there are value opportunities in the cargo sector as some airlines that are poorly capitalised could be looking at spinning off their non-core operations.
• We believe downside risk for SATS is limited, but the speed of its recovery still depends on relaxation of travel restrictions.

SATS - Valuation & Recommendaiton

• Long-term investors can value SATS on DCF (WACC 6.6%), yielding equity value of S$4.5bn or S$4.00 per share.
• SATS's share price is 92% correlated to Changi’s passenger and flight movements, and 77% correlated to cargo volumes. Hence, key re-rating catalysts still depend on borders reopening for discretionary travel, and vaccine availability.

Source: CGS-CIMB Research - 4 Sep 2020