CGS International analysts Tay Wee Kuang and Lim Siew Khee are keeping their “add” call on Singapore Airport Terminal Services (Sats) with a raised target price of $4.10 from $3.44 previously as the company reported a 48.7% q-o-q improvement in core net profit for the 4QFY2023 ended March.
This comes despite the “seasonally weaker” cargo demand period between January and March, as well as on the back of a 1.2% q-o-q decline in revenue.
Tay and Lim write in their July 30 report: “We think that the improvement in profitability suggests Sats is at an inflection point of better operating leverage that should translate into better margins ahead.”
The analysts also see data from the International Air Transport Association (IATA) noting that monthly global air cargo volume by cargo tonne-kilometre (CTK) in April and May continued to grow by more than 10% y-o-y, due to support from the booming e-commerce industry and capacity constraints in global maritime shipping.
Meanwhile, the analysts expect the incremental improvement in the utilisation of Sats’s new central kitchens in Tianjin, China, and Bangalore, India as well as Thailand to contribute to improving margins for the segment from 1QFY2025.
They write: “Previous conversations with management also suggest that cost pass-through for the segment will be more effective given that adjustments for higher raw material prices are typically embedded in its food solution contracts with its key customers.”
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“We note that Sats’s cost of raw material trended back down towards 35% of its food solutions segment’s revenue in FY2024, compared to 26% to 30% in FY2016 to FY2019,” adds Tay and Lim.
Overall, the CGSI analysts are optimistic on the company's earnings estimates.
“We increase our FY2025/FY2026/FY2027 earnings estimates by 88.1%/24.7%/0.6% as we see better operating leverage to drive recovery of profitability back to pre-Covid levels from FY2025.”
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They add that Sats is also “likely to see” increasing benefits from ongoing contract repricing and new contract wins, which continued in 1QFY2025.
The analysts new target price implies a FY2026 price-to-earnings ratio (P/E) of 23.9 times, slightly above Sats’s historical average across FY2013 to FY2019 of 20.2 times, which they note as “reasonable” given the company’s FY2025 to FY2027 earnings per share (EPS) compound annual growth rate (CAGR) of 15%.
Re-rating catalysts noted by Tay and Lim include better-than-expected margins from commercial and cost synergies, while downside risks include weaker cash generation in FY2025 from higher-than-expected capital expenditure (capex) outlay, the potential reversal of cargo demand following the escalation of trade wars and lastly, slower-than-expected revenue momentum from its food solutions business impeding margin expansion.
As at 1.15 pm, shares in Sats are trading 3 cents lower or 0.92% down at $3.25.
