CGS International analysts Tay Wee Kuang and Lim Siew Khee have kept their "add" call and $3.44 target price on Sats, on expectations that the ground handler should be able to improve its earnings and when it resumes paying dividends, help improve investors' confidence.
In their April 8 note, Tay and Lim acknowledge investors' concerns that while Sats has shown steadily better operating numbers, its ebit margin of 8.8% in the most recent 3QFY2024 ended Dec 2023 remains way below the five-year average of 15.8%.
Sats believes there will be room to improve its profitability via multiple ways. First, by winning over new customers such as a recent deal with Etihad to handle cargo across 12 stations.
Next, Sats is planning to upscale its operations across newer kitchen facilities in Tianjin and Bangalore, as well as pass on costs through ongoing contract renegotiations and rightsizing of its enlarged portfolio following its acquisition of WFS, and thereby drive better operational leverage and cash flow generation.
By doing so, Sats would be able to undertake the so-called 3Rs: repayment of debt; reinvestments in operational capex, and the resumption of dividends to further improve shareholders’ returns.
For the current 4QFY2023, the CGS International analysts estimate Sats will report a core net profit of $19.9 million following a seasonally stronger 3QFY24 core net profit of $31.2 million, which would put full-year FY2024 core net profit at an estimated $51.1 million.
Positive free cash flow of $118.1 million for 9MFY2024, which should further improve as at end of FY2024, will then put Sats in the position to resume dividends and "catalyse" its share price as investors gain confidence that Sats will continue to deliver profitable quarters ahead.
Tay and Lim's discounted cash flow-based target price, using a weighted average cost of capital of 9.9%, is kept at $3.44.
Further re-rating catalysts include asset recycling activities that would help generate further cashflow, as well as stronger growth in cargo volumes.
On the other hand, downside risks include deferment of dividends, weaker performance of Sats' network of associates and joint ventures across the region, as well as weaker global trade flows, negatively impacting global cargo demand.
