Following the release of Singapore Airport Terminal Services (SATS)’ 1HFY2024 ended Sept 30 results, analysts are mixed, despite the group’s results meeting expectations.
On Nov 10, SATS announced a loss of $7.8 million for the half after taking into account higher interest expense, marking a $24.7 million or 76% improvement y-o-y from 1HFY2023’s loss of $32.5 million.
See more: SATS’ 1HFY2024 loss of $7.8 million marks 76% improvement y-o-y
CGS-CIMB Research analysts Tay Wee Kuang and Lim Siew Khee have upgraded their call to “add” from “hold” with a higher target price of $3 from $2.86.
In their Nov 13 report, the analysts note that SATS has returned to profitability in the 2QFY2024 with a core profit after tax and minority interest (patmi) of $16.8 million, attributed to better operating leverage q-o-q, as revenue grew 7.0% q-o-q, outpacing operating expense (opex) growth of 4.5% q-o-q.
They add: “Its 12.9% q-o-q lower depreciation and amortisation expense was a result of ongoing determination of intangible assets and goodwill from a purchase price allocation (PPA) exercise, as a result of SATS’s acquisition of Worldwide Flight Services (WFS).”
Staff count had also declined slightly by 0.7% q-o-q despite a 4.8% q-o-q growth in staff costs, suggesting that the group has reached an “optimal level” of staffing.
Meanwhile, contributions from SATS’ share of associates and joint ventures (SoAJVs) also improved 8.5% q-o-q to $23.1 million in 2QFY2024 in countries such as China and Japan, where the group serves the recovering aviation catering market.
On SATS’ food solutions segment, Tay and Lim observe that the group which had reported earnings before interest and taxes (ebit) losses since 2QFY2022, recorded an ebit of $2.7 million in 2QFY2024 with an ebit margin of 1%.
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“We think the continued recovery in the aviation industry would drive meals served on flights for SATS, resulting in the segment’s ebit margins reverting towards FY2018 to FY2020’s average of 14.7% by FY2025,” write the analysts.
The CGS-CIMB analysts will keep an eye on SATS’ cash management, as despite the group’s return to profitability in 2QFY2024, they note that it reported an operating cash outflow of $10 million in the quarter.
They add: “Furthermore, there was an additional $112.2 million in repayment of lease liabilities in 2QFY2024 which was up from $78.5 million in 1QFY2024, which was partially offset by a $63.3 million increase in proceeds from borrowings. Nevertheless, with a cash balance of $515.9 million at end-2QFY2024, we think that there is scope for SATS to pay down some of its borrowings from its acquisition of WFS.”
As SATS enters the year-end travel season, Tay and Lim see better quarters ahead for the group, and upgrade their call on better visibility of sustained profitability.
They note: “We increase our FY2024 earnings per share EPS by 121.2% as SATS had returned to profitability one quarter ahead of our expectations, while revising our FY2025 and FY2026 EPS upwards by 49.0% and 22.4%, respectively, as we see better operating leverage.”
Re-rating catalysts by the analysts include stronger revenue momentum for the aviation industry driving better operating leverage and positive cash flow which could lead to a resumption of dividends, while downside risks include deteriorating cash generation, as well as a recession affecting the aviation industry.
DBS Group Research analyst Jason Sum has kept his “buy” call on the counter with a higher target price of $3.40 from $3.20.
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“We find the present risk-to-reward setup attractive and anticipate a 20% - 25% upside from the current share price level,” Sum writes.
According to his estimates, SATS’ 2QFY2024 results were also in line with his expectations, with a significant improvement in its operating margins.
Further to his report dated Nov 15, Sum sees that the sustained recovery in global air passenger traffic as well as growth in non-travel food business will drive earnings momentum for the group
“The global air cargo market appears to be stabilising, and we foresee the group’s ground handling and in-flight catering businesses benefitting from the global recovery in air travel. Moreover, SATS’s non-travel-related food business should also register healthy growth, underpinned by the group’s expanding product portfolio and customer base, and increased production capacity and footprint,” he says.
SATS’s acquisition of WFS should also start to see “operational and financial synergies over the
next few years”. That said, the analyst is aware that the market will be paying attention to the assimilation of WFS with SATS and whether the group can achieve its “intended operating synergies within its projected timeline, to justify the price paid for WFS”.
To this end, Sum projects SATS’ core earnings per share (EPS) to reach 20.6 cents in FY2026, or at 93% of its levels in FY2019.
Key risks noted by Sum include global macroeconomic instability that could delay the normalisation of air passenger traffic or negatively impact air cargo volumes, as well as potential execution risks associated with integrating WFS and achieving the anticipated synergies.
UOB Kay Hian Research (UOBKH) analyst Roy Chen has kept his “buy” call on the counter following the turnaround in the group’s earnings. “Excluding the impacts of the PPA change for WFS and one-off items, SATS’ 2QFY2024 earnings would have been in line with our expectation,” he writes.
The group’s net gearing, at 89.8% as at Sept 30, was also “adequate” and in line with Chen’s estimate. “We deem this level of gearing as adequate, as we expect SATS’ profit and free cash flow to improve ahead as its business volume recovers,” he says.
Chen also understands that despite statistics from the International Air Transport Association (IATA) stating that the global air cargo load rose 1.9% y-o-y in September, which marks the second consecutive month of y-o-y growth which he partially attributes to a low base in similar periods last year, the global trade outlook is still largely subdued.
“Despite the y-o-y improvement in September, global cargo load was still 1.3% below September 2019 pre-pandemic levels. Global manufacturing purchasing managers index (PMI) and new exports order sub-index stood at 48.8 and 47.6 respectively in October, still in contractionary territory, indicating a subdued global trade outlook in the near term,” explains Chen.
With this, the UOBKH analyst understands that SATS has “meaningful room for recovery”.
Chen writes: “For SATS’ original businesses excluding WFS, the numbers of flights handled, aviation meals catered and cargo tonnage handled were at only 82%, 83% and 93% of pre-pandemic levels respectively. Since SATS’ workforce strength should have largely stabilised after the early round of recruitment, moving forward, we expect operating leverage to kick in and help with SATS’ earnings recovery as business volume continues to recover.”
In his Nov 14 report, Chen has lowered his target price to $2.90 from $2.99 previously. He has also cut his earnings estimates for FY2024 and FY2025 to $41 million and $159 million while keeping his FY2026 forecast at $285 million.
“[This is] to reflect a more moderate pace of earnings recovery for SATS,” he says. “We expect SATS’ earnings to remain on the recovery track in the next 1.5 years and look at FY2026 as the year that it can realise its full earnings potential.”
Chen’s new target price is based on 9.7x FY2025 EV/adjusted ebitda, which is the same as SATS’ acquisition multiple for WFS.
“The 9.7 times multiple applied is at 1.7 standard deviation (s.d.) below SATS’ FY2014 - FY2019 mean EV/ebitda of 12.8 times. SATS’ current price implies an undemanding FY2025 EV/adjusted ebitda multiple of 9.0 times, 2.1 s.d. below its historical mean. [Its] current price translates to FY2025/FY2026 P/E of 24.1 times/13.4 times,” he says.
Key risks noted by him include a prolonged weakness in the global trade outlook, and integration risks between SATS and WFS.
PhillipCapital downgrades call to ‘reduce’
Unlike the positive calls by the rest of the analysts, PhillipCapital analyst Peggy Mak has downgraded her call on SATS to “reduce” from “neutral”. The downgrade comes amid a “disappointing” mix despite SATS’ results coming in line with her expectations.
Negatives noted by Mak in her Nov 14 report include an operating margin of just 0.3% as well as a 1HFY2024 ebit, which barely covered the group’s interest expenses as its net debt rose.
Excluding the contribution from WFS, the group’s operating profit was $3 million,” notes the analyst. The group’s food solutions segment incurred a marginal operating loss of $0.9 million despite its revenue returning to the pre-pandemic level of 1HFY2020
“We believe the key reasons were a rise in operating costs, chiefly staff costs due to a manpower shortage in Singapore and Hong Kong, and a fall in revenue from non-aviation at 13.8% y-o-y due to lower catering and distribution demand,” says Mak.
She adds that further growth is “limited”, given the manpower and capacity bottlenecks faced by airlines. And further improvement in SATS’ food solutions earnings “could be” muted.
That said, all is not lost as SATS reported a growth in cargo volume in August and September.
“If the momentum sustains, operating leverage from higher volume could lift overall operating margin from 3.1% currently,” says Mak.
Looking ahead, the analyst sees that rising costs and interest expenses could hinder SATS’ earnings recovery while working capital needs could rise with the inclusion of WFS.
In addition to her downgrade, Mak has lowered her target price to $2.23 from $2.51 previously to factor in the higher working capital at WFS.
Shares in SATS closed six cents higher or 2.26% up at $2.72 on Nov 15.
