• There was sequential quarterly improvement in flights, passengers handled, cargo and meals in 2Q21, as travel arrangements with more countries for essential travel were established.
• SATS's 2Q21 EBIT reached breakeven with positive EBITDA due to cost management, especially staff costs. Staff count fell from about 17,000 last year to 13,000 currently. Operating margins as a result, came in above expectations. Associates losses also narrowed from S$31m to S$13m in 2Q21.

Recovery in focus, assumptions intact

• The worst is over, expect continued quarterly improvement. While losses were largely anticipated, positive signs came in the form of 2Q21’s core earnings outperformance. We believe the worst is over for Changi, as more flights resume post the implementation of the Circuit Breaker in CY2Q20.
• We anticipate aviation outlook to be better with easing border restrictions that would facilitate mass travel. Furthermore, we maintain our assumption of a vaccine being commercialised sometime in 2021.

Our assumption of vaccine commercialisation in 2021 is still in play.

• With a total of 10 COVID-19 vaccine candidates currently under Phase 3 trials, our assumption of at least one that can be commercialised in 2021 (10% hit rate) is still on track. Supporting our assumption is the positive announcement of PfizerBioNTech’s vaccine showing a higher-than-expected 90% efficacy, with no serious side effects thus far. This is a boost for vaccine development and to our recovery scenario. While this trial may take another month or so to complete, we believe it signals the start of an anticipated stream of Phase 3 trial outcomes that is right in line with our view.
• Other vaccine makers such as SinoPharm, Moderna and AstraZeneca are expected to complete their Phase 3 trials by year-end with more to follow in 1Q21.
• Our assumptions remain in play as long as at least one Phase 3 trial is successfully commercialised.

Air travel bubble (ATB) to support Changi’s throughput.

• We expect more flights in the coming quarters backed by more essential travel and Air Bubbles being established. The first ATB with Hong Kong announced this week will help to improve throughput at Changi in the coming quarters, starting with one flight a day into each city with 200 passengers each way from 22 November 2020, and from 7 December 2020, two flights per day.
• Barring the key risk of a the two-week suspension if the seven-day moving average of the daily number of unlinked COVID-19 cases is more than five in either Singapore or Hong Kong, the success of this ATB will make way for further Air Bubbles to be established in the next few quarters. We identify this to be a further catalyst for Changi’s throughput to improve.

Raise SATS's FY22-23F earnings forecast by 4-11%.

• On the back of earlier than expected positive newsflow in vaccine development and easing of border restrictions, as well as core outperformance in 2Q21’s operating profit, we are accelerating our recovery assumptions in 2021 (FY22F) slightly, raising our SATS's FY22-23F earnings forecast by 4-11%. This is largely premised on turning slightly more positive in our revenue forecasts as well as margins through cost management in the coming quarters.
• There is a net headline earnings cut of 17% for FY21F, due to the S$31.6m impairment recognized in 2Q21. Otherwise, we have also raised our 2H21 earnings slightly on better margins.