• SATS's 1QFY22 net profit of S$6.4m (vs. 1QFY21 net loss of S$43.7m) was above our S$4.4m. S$3m-4m tax credit helped. Revenue flat q-o-q (46% non-travel).
• Key positives from results: third consecutive quarter of positive EBITDA; early repayment of S$150m term loan; and associates losses narrowed 83% q-o-q.
• Key negatives: higher handling costs in Singapore from stricter COVID-19 measures at Changi, and slight delay in reopening of Changi.

Tax Credit Helped, Recovery Underway

• SATS (SGX:S58)'s 1QFY22 (Apr 2021 to Jun 2021) net profit came in at S$6.4m (vs. 1QFY21 net loss of S$43.7m), 47% above our expectations of S$4.4m and at 12% of our full-year forecast. This included tax credit of S$3m-4m and government relief of S$45.5m.
• Revenue of S$276m (+32% y-o-y, -1% q-o-q) was 8% higher than our forecast, as a result of stronger-than-expected contribution from gateway services, i.e. cargo/non-travel security (15%/7% of group revenue).
• While all regions, except Singapore (S$16.1m, +274% y-o-y), recorded losses, we like that losses have reduced significantly compared with 1QFY21, with India (+90% y-o-y) and ASEAN (+87%) recording the largest improvements.

Stricter COVID-19 Measures Mean Higher Handling Costs

• SATS's 1QFY22 total opex was up S$16m q-o-q and EBIT margin declined q-o-q to 1.3% (4QFY21: 8%). This was mainly due to higher staff costs, partly from lower JSS (-S$5.6m q-o-q) and higher handling costs/overtime due to COVID-19 restriction measures. For instance, higher contract costs to handle the segregation of high-risk countries’ passengers into Changi, and low cost efficiency for cargo handling of passenger aircrafts.

Significant Improvement in Associates

• SATS associates’ contribution of a S$1.2m loss as growth in non-travel segments in China and India.

Early Repayment of Term Loan, Strong Balance Sheet

• SATS achieved its third consecutive quarter of positive EBITDA and an FCF of S$7.9m in 1QFY22. The group repaid S$150m that was drawn in 4QFY20 as a contingency measure at the onset of COVID-19.
• SATS ended 1QFY22 with net cash of S$222m.

Non-travel Contributed 46% of Revenue

• SATS hope to achieve 50/50 revenue contribution from its security services.

M&A Efforts Continue

• SATS’s M&A pipeline is not to look for undervalued assets. We do not expect sizeable M&As in the near term.

Reiterate ADD Call on SATS

• We cut our SATS's earnings forecast to benefit from the reopening of Changi in 2022F, amid global ongoing vaccination efforts.
• Key catalysts include faster-than-expected border reopening, while key risks include a new wave of the COVID-19 pandemic.

Source: CGS-CIMB Research - 22 Jul 2021