+ Responding with aggressive cost cuts. Excluding the government grant of S$21.9mn (two months) in 4Q20, SATS has managed to lower staff cost by 16% YoY, more than the 8% decline in revenues. Some of the lower cost driven by pay cut from management in late February, less overtime, reduced contract services, foreign worker levy rebates and property tax / rental rebates.
+ Other sources of revenue. Some of the new areas of revenue includes wholesale supplier to cloud kitchens catering to home deliveries. Another source of revenue was cruise centre support to house foreign workers in cruise ships.
– No final dividend. The was no final dividend compared with 13 cents a year ago. The company needs to be prudent and retain cash due to the uncertainties.
Liquidity will more critical than any elusive profitability this year. We expect a severe contraction in aviation revenues, which accounts for 76% of 4Q20 revenues. The company geared up with S$305mn loan proceeds in 4Q20 to amass S$549mn of cash on its balance sheet. If we annualised 4Q20 fixed cash operating cost (staff, utilities, other costs), the run-rate will be around S$1bn. More aggressive cost cuts are needed. SATS is temporarily closing Inflight Catering Centre 1 (ITC 1) and consolidate operations at ITC 2. 1Q20 guidance is for a net loss of S$50mn.
Downgrade to SELL from NEUTRAL; Lower target price to S$1.95
The path to recovery is unclear. Absence of dividends and net losses to persist, a more conservative benchmark to valuations will be the price to book ratio. We have taken the average of 1.35x during the global financial crisis in 2009 as a benchmark for our valuation.