PhillipCapital analyst Liu Miaomiao has upgraded her call on Sats to “buy” at a raised target price of $4.37 from $3.45 previously following the group’s successful contract repricing with its major customer, Singapore Airlines C6L (SIA).
For the FY2024 ended March, 17.3% or $892.9 million of Sats’ total revenue came from SIA.
“Although this represents a lower contribution compared to 39.9% in FY2023, SIA remains a crucial customer,” writes Liu in her September 5 report.
The new contract, effective April 1, spans the next five years, and the analyst expects at least a 5% price escalation, potentially improving Sats’ revenue by $45 million with higher margins.
She adds: “We believe that the majority of contracts will be indexation-linked, and with inflation being a global issue, more repricing opportunities may arise in FY2025.”
The group’s cargo handling continues to be a key driver of its gateway services business segment, thanks to a 17.7% y-o-y revenue growth in-line with the 19% y-o-y increase in cargo volume. Liu expects cargo handling to be the primary revenue catalyst in FY2025.
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“While we foresee cargo volumes to moderate from current highs due to elevated cargo rates, we believe Sats will still outperform the industry average forecast of around 5% volume growth. We project a growth rate of around 15% on a full-year basis.”
Liu’s outlook is supported by new partnerships and additional warehouses, while the group is also insulated from potential fluctuations in air cargo rates, as Sats charges based on cargo activities handled.
Another positive update is the group’s introduction of a new cargo handling fee for consignees on inbound air cargo into Singapore, effective August 1.
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Liu expects this to generate an additional $6 million to $9 million in annual revenue, directly contributing to earnings before interests (ebit) without incurring additional cost.
“We do not expect the new pricing arrangement to impact future contract wins, as SIA's rates remain lower than those of its competitors,” adds the analyst.
While revenue per employee declined 38% y-o-y to $54,000 in FY2023 due to China and Japan’s slower recovery, Sats’ improved cost management and operating leverage post-World Flight Services (WFS) acquisition has allowed the group to nearly double the figure to $104,000 in FY2024.
Liu believes that the revenue growth will continue to outpace cost growth, allowing Sats to benefit from economies of scale.
Due to the successful integration of WFS, the analyst has reduced her weighted average cost of capital (WACC) assumption by 10% to 8.4%.
“With all segments showing positive momentum from the airline industry's recovery and benefiting from favorable operating leverage, we anticipate a strong performance from Sats in 2QFY2025.”
As at 12.12 pm, shares in Sats are trading 1 cent lower or 0.28% down at $3.60.
