Broker's take: DBS downgrades SATS to 'fully valued' with lower target price of S$2.66

DBS Group Research has downgraded SATS to "fully valued" from "hold", a call that implies a negative total return of more than 10 per cent over the next 12 months, until the outlook for the Covid-19 pandemic and regional travel numbers improves.

At the midday break on Thursday, shares in the ground handler were trading S$0.26 or 8.3 per cent lower at S$2.86.

In a report on Thursday, DBS analysts Alfie Yeo and Andy Sim wrote: "We maintain our neutral stance on SATS with a lower target price of S$2.66, factoring in further downside to earnings as we see new travel restrictions across the globe putting downward pressure on global air travel demand and net profit growth. We believe the worsening situation could delay any hopes of an early earnings recovery."

They have lowered their FY2021-2022 earnings forecast for SATS by 23-25 per cent to take into account lower throughput levels at Singapore's Changi Airport, and lower performance from its Japan businesses and regional associates.

"We have lowered our dividend per share (DPS) projection as well, given that it had cut DPS and payout ratio previously during the global financial crisis and requires cash resources for its expansion plans going forward," Mr Yeo and Mr Sim said.

Pricing in these cuts, dividend yield based on Wednesday's closing price of S$3.12 is now at about 4.2 per cent.

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Key risks to DBS's view are that current earnings forecast for SATS is premised on a recovery in the aviation sector from FY2022.

"A faster-than-expected recovery and a prolonged Covid-19 situation that subdues travel demand into FY2022 would pose potential upside and downside risks to our earnings forecast and target price respectively," DBS said.