SCS posted its 2019 results with net sales of VND748bn (+11% yoy) and NPAT of VND503bn (+15% yoy), which were in line with our expectations of VND753bn for net sales and VND502bn for NPAT.
For 2020, we previously forecast net sales of VND828bn (+11% yoy) and NPAT of VND564bn (+12% yoy). However, to reflect the impact from the coronavirus epidemic on trade flows and air cargo demand, we revise down SCS’s international air cargo volume growth to 0.5% yoy from 7.1% yoy (read our base case scenario below). In response to this revision, we lower the 2020f net sales/NPAT to VND768bn/VND529bn, equivalent to annual growth rates of 3%/5%.
While near-term financial results are likely to suffer, we strongly believe that 2020 will be a good time to Accumulate SCS with a one-year target price of VND125,000/share (revised down from our last TP of VND130,000/share in the 2020 Strategy report). The reasons are: (1) valuation should be more compelling as the stock price may correct to reflect market’s expectation on lower profit growth; (2) long-term outlook remains resilient thanks to positive impacts of EVFTA (expected to be effective in H2 20) and the recovery of global trade and its positive impact on the Vietnam air cargo market. Furthermore, SCS’s robust operating cash flow and low capex demand enable the company to maintain a high dividend payout policy, which leads to a decent dividend yield of 6%.
2019 recap: Despite international cargo volume growth decelerating as demand dampened, net profit still posted a double-digit growth thanks to profit margin expansion
A series of negative headwinds (Hong Kong Airport shut down in August 2019, international trade tensions and global growth slowdown) altogether weighed significantly on Asia Pacific air freight volume. Accordingly, IATA estimates that the regional FTKs fell by 6.4% yoy in 2019. Despite this weakening in regional air freight demand, the growth rate of international cargo throughput at SCS’s terminal still rose by 6.6% yoy, albeit lower than in 2018 by 1.7ppts yoy. However, a 4% increase in ASP, which we attribute to the rising prices charged to airlines thanks to the duopoly nature of the market, resulted in 11% growth in the cargo terminal segment sales.
While top line grew by 11%, COGS only rose by 3%, helping GPM inch up by 1.3 ppts yoy. We estimate labour costs and depreciation expenses contributed 72% to COGS, nearly unchanged from 2018.
Flat administration costs and higher interest income, a result of robust operating cash flow and minor CAPEX demand, also boosted net margin by 2.4ppts yoy.
Base case scenario for SCS’s 2020 international cargo volume
For 2020, we believe the coronavirus outbreak and the SGN’s runways rehabilitation plan would be critical factors that will be a drag on cargo throughput growth and, therefore, financially compromise SCS. The coronavirus outbreak will impact near-term operating performance given that cargo volumes from China and Hong Kong, which account for 7% and 15% of the company’s cargo volume respectively, will shrink following airlines cutting back on service to HCMC.
Our base case scenario assumes that the coronavirus will be contained and airlines will resume regular service by the end of April 2020. Afterwards, air cargo volumes are likely to pick up as companies may seek to change their shipping strategies from container to airplanes so as to make up for lost time. SGN’s runways closure for maintenance will start from August until the end of the year, which will make SCS’s international cargo volume growth end 2020 on a “weak note” of 0.5% yoy.