UOB KayHian downgrades SATS to Sell after ‘triple whammy’ hits earnings

Airport departure board at Ho Chi Minh City airportAirport departure board at Ho Chi Minh City airport

UOB KayHian downgraded SATS to Sell after the aviation caterer’s fiscal first quarter earnings missed expectations on a “triple whammy” of weak air cargo, Jet Airways exposure and the grounding of Boeing’s B737 Max planes.

“We had warned that air cargo is likely to lead to lower fiscal first quarter of 2020 earnings, but we had underestimated the impact from Jet Airways and high opex,” the brokerage said in a note Friday.

“We expect SATS to face cyclical headwinds over the next few quarters and this should lead to lower earnings and price-to-earnings multiples,” it added.

SATS’s fiscal first-quarter net profit dropped 14.4 percent on-year to S$54.7 million amid the Jet Airways suspension, lower foreign-exchange gains and lower cargo volumes amid trade uncertainty, the aviation catering company said Thursday.

UOB KayHian said it had forecast a 4 percent decline in net profit for the quarter.

“SATS was affected by the grounding of Jet Airways, which led to lower flights handled and inflight meals. Collectively, SATS made a S$3.3 million provision for credit exposure, including that for the Indian associates,” the brokerage said. “Next, SATS was impacted by weaker cargo handled at Changi, which should not have come as a surprise to the street, given weak NODX numbers.

NODX stands for non-oil domestic exports; On Wednesday, Singapore reported June NODX tumbled a worse-than-expected 17.3 percent on-year, the fourth straight month of decline.

“Weakening air cargo volumes will pose headwinds for SATS and gateway associates. We expect operating environment to remain challenging over the next three quarters amid a slowdown in air cargo throughput across Asia,” UOB KayHian said. “Demand for
passenger traffic is still resilient, but there is a chance that that too would falter.”

The brokerage lowered its target price for SATS to S$4.80 from S$5.05 and cut its fiscal 2020-2021 net profit estimates by 5.4 percent each.

SATS shares were down 5.83 percent at S$5.01 at 4:41 P.M. SGT.

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