• IATA forecasts normalisation of air travel to pre-COVID-19 levels only in CY2024.
• No immediate visibility for mass travel to pick up.
• Expect SATS's Share Price to chug along while awaiting travel recovery, which may take awhile.

More Positive on Air-travel Outlook and Long-term Forecast

Air travel to normalise to pre-COVID-19 levels by 2024.

• Based on IATA’s projections, we see international air travel normalising (8 trillion RPK threshold – Revenue Passenger Kilometer) at around CY4Q23 (FY3Q24 for SATS). With over 90% of revenue tied to Aviation, we believe earnings recovery for SATS (SGX:S58) will be a slow and gradual course.

Current forecasts on track for earnings normalisation in FY25F.

• We chart SATS’s earnings recovery to normalise in FY25F. Taking guidance from IATA’s outlook for international air travel, we see SATS achieving normalised earnings of S$240m in FY25F (CY24). Between now and then, we see net losses for FY21F, but with a gradual improving earnings traction towards FY25F. This has led us to keep our FY20-21F earnings forecasts unchanged, as they are on track for normalisation in FY25F.

DCF assumptions realigned to be more aggressive.

• As our previous DCF projections for free cash flow to the firm (FCFF) were flattish, we have now factored in earnings normalisation in FY25F, which implies a more positive long term FCFF. This results in a more positive DCF-based valuation for SATS.

1Q21 Earnings Tracking Recovery

• SATS's 1Q21 earnings within expectations. Revenue and losses of S$209.4m (-55% y-o-y) and S$43.7m (-180% y-o-y) respectively were in line with our expectations. The decline was dragged by the weak international aviation market.
• The 73.3% y-o-y increase in Non-Aviation (+S$41m) arose from the consolidation impact of Country Foods to the top line that was absent last year. Country Foods added S$41-42m to 1Q21 figures, implying no core revenue growth.

About Country Foods

• Country Foods (formerly SATS BRF Food Pte Ltd.) is the biggest meat importer, distributor and processor in Singapore with more than 1,000 clients and 800 white-label and branded products including Farmpride and Amir’s Country Foods. It was first consolidated in Sept 2019 (2Q20), making this 1Q21 the last full quarter of “headline revenue growth by consolidation”. There will be two months of disparity next quarter for July and August 2020 and thereafter 3Q21’s Non-Aviation revenue will be fully normalised.

Air Travel to Normalize by 2024 - IATA Forecast

Outlook – measured recovery.

• Our outlook for SATS is generally a measured recovery. Barring unforeseen circumstances, earnings should trend towards normalisation in FY25F. Signs of recovery will be seen when mass travel returns to Changi.

Earnings largely unchanged, operating losses improvement offset by weak associates in 1Q21.

• We have refined our forecasts based on the reported results of 1Q21 which reflects the collapse in Changi and visitor arrivals in Singapore. We project lower operating losses due to
  1. 1Q revenue was higher than our estimates, and
  2. higher savings in staff costs, from extension of another seven months of Jobs Support Scheme (JSS) which the government has just announced.
• Our earnings forecast for SATS are unchanged as we factor in higher associate losses of S$31m in 1Q20. This offsets the improvement in operating losses. Our estimate for FY22F, tracks earnings improvement towards normalization by FY25F.

Target Price Raised to S$3.15

• Our earnings are largely unchanged, but our Target Price based on average of DCF and PE is raised higher to S$3.15 as a result of more aggressive FCFF assumptions towards FY25F, since air-travel is expected to normalise by then. Our previous FCFF assumptions were largely flattish and hence we are more positive following our realignment with IATA’s forecast.
• There will be upside risk to our projection if travel restrictions are lifted sooner than expected, and when an effective vaccine is found and made available for mass passengers, anytime over the recovery period.

Source: DBS Research - 7 Sep 2020