SATS’ (SGX:S58) share price has been
battered by the COVID-19 situation, with a year to date decline of 44% as of yesterday’s
closing.
As some of you may have read, I
bought SATS at $4.49 earlier in February. I had been following SATS for a
long time, and really liked how the company operates and its growth prospects.
At that point of time in early Feb, the Covid-19 situation wasn’t expected to
spread so rapidly, hence I felt that the dip in price was an opportunity to
accumulate. Subsequently, pandemic spread across the globe, resulting in almost
all passenger flights at Changi Airport being grounded. With each new travel
ban announced, SATS’ share price continued to take a beating, as their main
revenue streams were cut off.
Evidently, the aviation industry
has been battered by the shutdown of airports and grounding of flights. US
airlines have been negotiating bailout packages with the government, while
closer to home, SIA has recently announced a rights issue and a convertible
bond offering, to shore up its balance sheet during this challenging time. SIA
expects to raise a total of S$8.8 billion, a huge sum which would allow it to
withstand these unprecedented times.
With the Covid-19 situation still
uncertain and travel bans still expected to be in place at least for the next
couple of months, I wanted to look at how SATS’ cash flows would fare in this
environment. Specifically, I wanted to estimate how many months of cash burn
would SATS be able to withstand before their cash pile is depleted. I was
inspired to write this post, after reading Brian’s post on
ForeverFinancialFreedom, where he wrote about the cash burn of Singapore Airlines (SIA). I have
included the link to his blog here, if you are keen to read further:
Please note that the following estimations are for informational and learning purposes only, and should not be taken as financial advice regarding SATS' shares. All figures and estimations used in the following discussion are for informational purposes, and should not be taken as a solicitation to transact in SATS' shares. When in doubt, please approach a registered financial advisor for advice.
Firstly, I used SATS’ income
statement from FY2019, and used the annual figures to calculate a monthly
breakdown of revenue and expenses. The key assumption here is that revenue and
expenses are evenly split across the months, whereas in reality, air travel
tends to peak during the school holidays and during the year end period.
 |
| Source: SATS Annual Reports, Author's estimates |
Revenue
SATS’ latest annual report,
aviation services made up 85.7% of revenue. While passenger travel has fell
sharply since the travel restrictions were imposed, cargo flights have declined
by a lesser degree, as seen from the Air Statistics that Changi Airport reports
monthly. Data from Changi Airport’s website showed that passenger movements
fell 32.8% in February 2020, from a year earlier. Whereas for commercial
aircraft movements, it was down 12.3% for the same period. Hence for February,
I estimated that revenue would have declined by 33%. For March 2020 onward,
after the complete ban of all short term visitors to Singapore, air travel is almost
non existent, apart from the few flights bringing Singaporeans home. SIA
indicated that it has grounded 96% of its fleet.
Non aviation revenue accounted for
14.3% of revenue. While non aviation revenue would also be affected as SATS
serves cruise ships as well, their food solutions revenue for non-aviation
segment may be less affected. For example, SFI provides catering services which
may be less affected by the restrictions. Additionally, SATS also operates
central kitchens which may still be operating, given that more packed food is
required for takeaways.
Hence, for March 2020 onward, I estimated
that revenue would fall 90%, with the remaining 10% revenue representing non-aviation
services and the air freight side of aviation operations.
Staff costs
For the February figure, I
estimated a 10% decrease in salary expenses, as the first round of pay cuts
were introduced in mid-Feb, which reduced the salary of management personnel,
allowed staff to go on voluntary unpaid leave or opt for early retirement. In
March, SATS announced another round of pay cuts, which included the board of
directors, senior managers, managers and assistant vice presidents.
Additionally, the Supplementary
Budget announced by DPM Heng included the Jobs Support Scheme, where the Government
will offset 75% of ground handling and airport operator’s salaries, capped at
$4,600. This would help SATS relieve a huge part of their costs pressures while
protecting jobs. As the average staff cost per employee is $52,304 as per their
2019 Annual Report, it would be reasonable to expect that the JSS would cover a
significant number of employees, as most of these staff would have salaries below
$4,600. Hence, I estimated a 50% decrease in overall salary expenses.
Raw material costs
This is most likely to be variable
in nature, given that SATS prepares in-flight meals based on demand. Hence, it
is likely that SATS would be able to reduce their raw material costs in
proportion to the decrease in revenue. For raw material costs, I pegged it to a
% of revenue, and increased it to 20% of revenue from c.14%, to account for the
fact that certain raw materials are perishables, which would have to be written
off if unused.
License fees
This part gets slightly tricky, as
SATS has operations both in Singapore and subsidiaries abroad. For Changi
Airport, I think it is fair to estimate that the bulk of the license fees would
be waived, as mentioned in the Supplementary budget. To quote from DPM Heng’s Budget
speech, “$350 million enhanced aviation support package to fund measures such
as rebates on landing and parking charges, and rental relief for airlines,
ground handlers, and cargo agents.” Hence, I estimated that 75% of license fees
would be waived.
Depreciation and amortisation
I have kept this constant based on
the past year’s figures. Depreciation and amortisation are non-cash expenses
which would only affect operating profits but not cash flows. Hence, while
depreciation remains constant, SATS’ cash flows would not be affected by these
figures. Subsequently, I added depreciation expenses back when estimating the
cash flows.
Company premise and utilities
expense
For utilities, there is both a
fixed and variable component as the company would still have to maintain a
certain level of operations, which would incur utility costs. Hence, I estimated
that company premise and utilities expenses would be cut by 60%. As per the enhanced
aviation support package discussed above, rental relief would also be provided
to ground handlers, although the actual amount is not specified. This would reduce
company premise expense (rental) as well.
Other costs
There’s quite a bit of ambiguity
here again, as SATS only mentioned in their Annual Report that “Other costs
increased due to higher fuel costs and IT expenses as we continue to invest in
technological initiatives to improve service and productivity. Other costs rose
to support increased project activities. In particular, professional services
costs increased, mitigated by foreign exchange gains and grants received during
the year.” Hence, SATS may undertake certain costs cutting measures and scale
down on new projects. I estimated that other costs would decrease by 20%.
Interest expense
SATS interest expense has been
very low due to its low debt. Recently, SATS raised 200m of debt at 2.88%,
which seems like a very favourable rate in this environment. This probably
reflects SATS’ strong balance sheet positions with very low debt (gearing ratio
of 6%), which allows it to borrow more during this period without significantly
affecting its financial position.
Share of results of
associates/joint ventures, net of tax
I did not discuss this figure,
which amounted to $58 million in FY2019 and $71 million in FY2018. I believe
that it is difficult to meaningfully estimate the impact on associates/JVs as
this would require a similar level of line by line analysis for each of the
associates/JVs. Hence, it is implied that there’s a zero contribution from the
associates/JVs during this period, although it is possible that profit contributions
from them could be negative if they were to make losses. That would further worsen
SATS’ cash burn.
Conclusion
As at 31 Dec 2019, SATS had 212.4
million in cash. In addition to the 200m raised last week, SATS appears to be
able to withstand the cash burn over the next few months. During this period, I
have taken profit and cut losses on other positions, but SATS is one that I intend
to hold for the long term. If you’re keen to learn more about how SATS earns
its revenue (during normal times), do check out my earlier post here:
Lastly, do note that SATS’ largest
shareholder is Temasek Holdings, with an approximately 40% stake. If things do deteriorate
further, would we potentially see Temasek step in, similar to the situation for
SIA? Only time will tell.
Note: As of time of writing, I hold shares in SATS
Please 'Like' my Facebook Page at:
Note: As of time of writing, I hold shares in SATS
Please 'Like' my Facebook Page at:
Follow me on Instagram at @AlpacaInvestments
If you enjoy my articles and would like to contribute, I have added a PayPal button on the right column, and any small contributions are sincerely appreciated!
If you enjoy my articles and would like to contribute, I have added a PayPal button on the right column, and any small contributions are sincerely appreciated!
No comments:
Post a Comment