Analysts from CGS-CIMB Research, Citi Research, DBS Group Research, OCBC Investment Research and UOB Kay Hian are remaining positive on SATS after the aviation company recorded a loss of $22.5 million for the 1QFY2023 ended March, from the $6.4 million in earnings in the same period the year before.
The loss was attributable to the higher costs incurred to ramp up capacity, which offset the quarter’s 36.2% y-o-y increase in revenue.
CGS-CIMB cuts EPS estimates, TP
CGS-CIMB analysts Tay Wee Kuang and Lim Siew Khee have kept their “add” calls on SATS as the company’s revenue for the quarter stood in line at 20.4% of their full-year estimates.
The recommendation also comes on the back of SATS’s operational recovery, which suggests “robust demand”.
“We estimate that SATS’s in-flight meals, a proxy for recovery within the aviation industry, returned to 52% of pre-Covid levels in 1QFY2023 and will reach 83% by the end of calendar year (CY)2023, tracking passenger traffic forecasts by International Air Transport Association (IATA),” the analysts write in their July 25 report.
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That said, Tay and Lim have lowered their earnings per share (EPS) estimates for the FY2023, FY2024 and FY2025 by 64.4%, 14.5% and 7.0% respectively.
The cut in FY2023’s EPS was due to the cost ramp-up in the near-term, while the EPS cuts in the FY2024 and FY2025 were due to the possible lingering of margin pressures.
“We expect headcount to rise beyond the previous peak of 17,000 during pre-Covid levels by 3QFY2023, due to the need to hire ahead of demand recovery and incremental headcount from Asia Airfreight Terminal’s (AAT) acquisition,” the analysts write.
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The lower cost of raw materials suggests better cost pass-through for the food solutions segment, note the analysts.
“We expect margins to hold at [around] 40% moving forward,” they add.
Further to their report, the analysts surmise that there could be a “revenue upside” from AAT as SATS’s management shared that the newly-acquired business contributed around $30 million of revenue in its first quarter compared to the $152 million contribution for the FY2022.
In line with their reduced EPS estimates, Tay and Lim have lowered their target price on SATS to $4.47 from $4.88 previously.
To this end, the analysts are expecting SATS’s losses to “narrow more significantly” in the 2QFY2023. The company is expected to return to profitability in the 3QFY2023, “supported by seasonality factors”, the analysts say.
“Upside risks include an early China reopening as well as acquisitions of earnings-accretive businesses; downside risks include delayed reopening of China and potential recession woes weighing on travel demand.”
SATS’s losses expected, says Citi Research
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Citi Research analyst Kaseedit Choonnawat is keeping his “buy” call on SATS with an unchanged target price of $4.70 after the aviation company’s core loss represented a q-o-q narrowing of 16%.
SATS has also remained the analyst’s top pick amid the Asean aviation sector.
In his view, SATS’s loss came as no surprise as the company had guided that the scaling up of costs will likely outweigh revenue for about two quarters during its post-results briefing for the FY2022 ended March.
SATS had announced its full-year results on May 30, 2022.
“With SATS guiding for a potential break-even upon Changi volume reaching 80%, we expect investors to focus on pace on Changi traffic recovery where Diio Mi’s forward schedule is pointing towards 80% of pre-Covid by end of CY2022,” Choonnawat writes.
Diio Mi is a platform that covers of 99% of the world’s airline schedules.
SATS’s net cash ex lease liability stood at $252 million in June, the analyst notes.
Not the time to ‘go long’ on SATS: DBS
DBS analyst Jason Sum is keeping his “hold” call on SATS with a lowered target price of $4.30 from $4.50 previously.
In his view, now is still not the time to “go long” on SATS as the company’s 1QFY2023 results stood slightly below the analyst’s expectations.
According to the analyst, the street was projecting SATS to bring in a net profit of $62.0 million for the full year even after factoring a back-ended recovery.
“Barring government grants (1QFY2023 should be the final quarter of government support), SATS would have booked a core net loss of $31.9 million,” he writes in his July 25 report.
The company’s costs, which are likely to increase at a faster rate than its revenue until the 2QFY2023, will also weigh on SATS's operating margins.
The company will also face multiple cost headwinds like front-loaded employee headcount additions, absence of government grants, wage inflation, and rising food costs, says Sum.
“We believe that the company’s recovery prospects are aptly baked into its share price with SATS trading at 22-24x FY2024 earnings,” he says.
However, the “robust turnaround” in activity levels in the aviation segment stood better than anticipated.
In addition, Singapore’s new Vaccinated Travel Framework (VTF) and the reopening of countries within the region will drive a “meaningful rebound” in the company’s travel-related revenue from the 1QFY2023 onwards.
To Sum, the heightened demand for air cargo underpinned by strong e-commerce volumes and the prolonged widespread supply chain disruptions, in addition to its pivot to non-aviation food channels, should also accelerate SATS’s recovery.
To this end, Sum has cut his net profit estimates for the FY2023 by 34.1% to factor cost headwinds and the narrower operating headwinds due to stronger-than-expected inflation woes.
He has, however, raised his revenue projection by 3.8% for the FY2023 to “reflect a more pronounced recovery in travel-related revenue as significant pent-up travel demand continues to be released over the short-term”.
The brokerage’s earnings projections are lower than that of the street’s, as it is “more conservative” on its operating cost assumptions.
OCBC Investment Research lowers TP to $4.72
OCBC Investment Research analyst Chu Peng is keeping “buy” on SATS with a lower fair value estimate of $4.72 from $4.94 previously.
While Chu expects the recovery trajectory to continue and accelerate in the 2HFY2023, she also sees cost pressures to linger in the 2QFY2023.
On operating costs, the analyst is expecting SATS to further increase the number of its employees as it invests ahead to prepare for a future recovery in Singapore and China. The company is also expected to expand is food business overseas.
That said, the hiring costs could be partly offset by higher productivity and cross-training programmes of employees.
“Note that Changi Airport’s Terminal 4 will resume operations in September and the southern wing of the Terminal 2 departure hall will also reopen in October,” she writes. “Given the impact of inflationary pressure, SATS is working to pass on part of its higher raw materials costs to their customers and is flexible to substituting different and cheaper raw materials for their meals.”
“Factoring higher operating costs, we revise our estimates and hence decrease our fair value estimate from $4.94 to $4.72,” the analyst explains.
In terms of environmental, social and governance (ESG) ratings, the company’s rating was downgraded in March due to the weakness in its governance practices, specifically its board structure.
"In addition, SATS lags peers on business ethics practices such as conducting compliance audits and limited evidence of environmental protection efforts,” says Chu.
“SATS outperforms its peers on social issues, with lower exposure to risk of accidents as it operates in Singapore, where data indicates accident rates are low. SATS also has strong health and safety policies, which are reinforced with audits, and certified operation standards,” she adds.
Accumulate SATS on price weakness: UOB Kay Hian
UOB Kay Hian analyst Roy Chen is maintaining his “buy” call on SATS with an unchanged target price of $4.20 as the company’s results for the 1QFY2023 stood in line with his estimates.
Like his peers at CGS-CIMB, Chen also expects the company’s ex-relief core net losses to continue to narrow in the 2QFY2023.
“We believe that SATS’ core profitability is likely to return to the positive territory in 3QFY2023 (i.e. the October – December 2022 quarter), when air traffic in Singapore is expected to have returned to close to 80% of the pre-pandemic levels,” he writes.
In his report dated July 25, Chen notes that SATS’s profitability is “highly sensitive to scale” as it gives it scope to optimise its resources and hence “harvest operation efficiencies”.
“Due to this reason, SATS’ profitability recovery is likely to see the highest delta towards the last mile of the recovery journey, in our view. This explains the 26% discrepancy between our FY2024 net profit forecast of $154 million vs consensus’ forecast of $208 million,” he explains.
“China (historically contributing to about 11% of air traffic in Singapore) is still in a largely lockdown state today and has no timeline of opening up. Given our belief that the opening up of China’s borders (when it happens) would be a gradual and orderly process (so that the society can adjust and its medical resources can accommodate), we are still looking at FY2025 (CY2024) as the year that SATS’s profitability can possibly recover to pre-pandemic levels,” he adds.
To this end, Chen has upped his net profit estimates for the FY2023 to $64.5 million from $49.9 million to reflect a one-off gain from SATS’s disposal of its stake in Brahim’s SATS Investment Holdings.
He has kept his net profit estimates for the FY2024 and FY2025 intact.
“Given our belief that SATS would be still loss-making in the near term, we recommend investors to accumulate SATS on share price weaknesses.”
Shares in SATS closed 3 cents higher or 0.76% up at $3.97 on July 26.
