As the aviation industry recovers with borders reopening, this bodes well for the ancillary services that support the airlines and airports around the world.
For Singapore, ground handler Sats has returned to a full year of profitability, recording profits in all four quarters of its FY2022 ended March.
However, this profitability was supported by $145.8 million of government grants. What this means is that while Sats recorded earnings of $20.4 million for its FY2022, should these grants be stripped out, Sats would show a loss of $112.3 million.
Still, this has not stopped investors from investing in the stock and waiting for the recovery. While it has not reached its pre-Covid levels of about $4.80 to $5.40, Sats closed at $4.26 on June 1, a 9.51% gain year-to-date.
However, long-time Sats shareholders who have been holding shares before Covid struck may be wondering, could the company finally pay out dividends since it is already in the black?
After all, Sats had a track record of paying out ever-increasing dividends in the past few years. From FY2014, full-year dividends increased from 13, to 19 cents per share in FY2019.
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Due to Covid, however, FY2020 dividends fell to six cents, and the company did not pay out any dividends in FY2021 as it was incurring losses.
Shareholders will also not be receiving a dividend for FY2022, with CEO Kerry Mok saying that Sats will only pay a dividend when it “is in the black without government reliefs”, adding that only then will it be sustainable for the company.
Furthermore, the company is also preserving cash as it aims to develop its “second engine” for growth, referring to Sats’ goal of building its non-aviation-related revenue streams. “Therefore, we need to preserve some of this cash to give us the ability to fire away when we see opportunities,” he says.
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But this does not mean that Sats will only concentrate on growing and not sharing its profits. CFO Manfred Seah says that the management is working hard to get the company back to being operationally profitable.
Referring to the improvement in its results, he adds that “quarter by quarter, if it improves like this, we hope to be able to [pay a dividend] very quickly”.
Despite the improved results, analysts have mostly either downgraded their ratings on the stock or cut their target prices for Sats, saying that the company’s 4QFY2022 figures were a miss compared to their expectations.
Jason Sum of DBS downgraded Sats from a “buy” to “hold”, while cutting his target price from $4.90 to $4.50.
Sum says that its 4QFY2022 results were below expectations, and foresees that cost pressures will weigh on operating margins in the near term.
He explains that costs are likely to increase at a faster rate than revenue over the next few quarters due to multiple cost headwinds like front-loaded employee headcount additions, absence of government grants, wage inflation and rising food costs.
However, he does note that there is greater clarity on its recovery trajectory for the travel segment, saying Singapore’s new Vaccinated Travel Framework and the reopening of countries in the region will drive a meaningful rebound in travel-related revenue from 1QFY2023 onwards.
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Furthermore, a robust demand for air cargo, coupled with its pivot to non-aviation food channels, should accelerate Sats’ recovery.
Similarly, UOB Kay Hian’s Roy Chen has cut his target price to $4.75 from $4.85, echoing that Sats’ FY2022 revenue of $1.17 billion missed expectations and accounted for only 95% of his full-year forecast.
Specifically for 4QFY2022, he highlights that the revenue of $300 million was an unexpected decline from $308 million in 3QFY2022, due to lower contribution from Sats’ non-travel related businesses.
Core net losses excluding government reliefs widened, as Sats’ revenue recovery failed to keep pace with its operating cost increase. “We expect cost pressure from labour and food ingredients to continue to weigh on Sats’ financial performance in the near term,” Chen writes.
As such, he cuts his FY2023 and FY2024 core net profit estimates by 54% and 15% respectively, while leaving his FY2025 forecast intact, saying this reflects his expectation of keener cost pressure in the near term and a more backend-loaded earnings recovery.
Finally, Citibank’s Kaseedit Choonnawat maintains his target price of $4.60. While he also notes the earnings miss, he thinks the outlook for Sats is positive and expects an “inflection point” around 2HFY2023, where revenue improvement should outweigh cost increases linked to capacity that Sats has to re-scale up.
On a broader view, Choonnawat thinks that the aviation segment and traffic at Changi Airport continues to look upbeat, with forward schedules pointing to traffic of about 80% of pre- Covid levels by December.
“The proposed gradual easing of Covid restrictions in China from June 1 could mark the bottom of non-aviation food drag from September, while the quarter of June could remain tough given reduced mobility during April to May,” he writes.
Despite this, he maintains his “buy” call on Sats, based on air-traffic recovery, its defensive balance sheet position and China’s eventual reopening.
