Broker's take: DBS upgrades SATS to 'hold', says it is 'on track for long recovery'

DBS Group Research on Monday upgraded SATS to "hold" from "fully valued" while maintaining its target price at S$2.64. 

DBS analysts upgraded the stock as they do not see further downside on the back of the gradual reopening of the Singapore economy as the "circuit-breaker" period comes to an end. Economic activities are therefore expected to slowly pick up with precautionary measures still in place. 

According to DBS's economics desk, Singapore's gross domestic product (GDP) recovery will be long and protracted, with a return to pre-Covid levels anticipated only at the end of 2021, in line with many other trade-dependent industrial economies.

Still, barring another widespread outbreak, this places SATS on the path to earnings recovery in FY22, noted the report. 

Having said that, the outlook for regional aviation remains muted as travellers are cautious and will undertake only essential travel. The aviation industry will hence recover gradually, in line with the slow GDP recovery scenario forecast.

With passengers allowed to transit through Changi from June 2, it will kickstart the recovery of passenger arrivals, according to the report. 

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In addition, DBS analysts are also positive on the longer-term outlook with the opening of Terminal 5 on the cards. Despite the pandemic, the recent completion of Terminal 4, opening of Jewel and the launch of Terminal 5 by 2030 will contribute to Changi's traffic in the long run.

"We believe SATS is well positioned to benefit from higher air traffic as the increased handling capacity will be able to meet higher demand from more landing slots for airlines and to cater to more tourist arrivals and passengers using Changi as a choice destination for transit," noted the report. 

In addition, SATS has been diversifying non-aviation revenue streams. Non-aviation revenues made up 14 per cent of group revenues in FY2019. The company has been leveraging on its kitchens to provide more institutional catering through supply contracts with corporate clients and events. 

The report also pointed out that initiatives have been implemented to improve productivity and optimise the use of manpower with automation, given that staff and raw material costs make up the bulk of operating expenses at 73 per cent. Its value added per employee had improved from S$69,200 in FY2011 to S$85,620 in FY2019.

Aside from the prolonged effects of Covid-19, cost pressures and currency fluctuations are also key risks for the company. Increases in wages, raw materials or energy prices could dampen margins, noted the report. And with SATS deriving 14 per cent of its revenue from Japan in FY2019,  a softening of the Japanese yen will translate into lower reported Singapore dollars and vice versa.