SATS – Hopeful of improving profitability profile

Excerpts from CGSCIMB report

Sats Ltd (SGX: S58)

• We think that SATS should see qoq revenue growth of c.7% in 3QFY3/24F to c.S$1.37bn, driven by a recovery in cargo demand and higher IVAs.
• As such, we expect SATS to report a c.S$28m in PATMI (+70% qoq) in 3QFY3/24F, with higher qoq revenue driving better operating leverage.

We reiterate our Add call and lift our DCF-based TP (WACC: 9.9%) to S$3.44 from S$3.00 after lowering our WACC due to lower risk-free rate assumption.

Recovery of global cargo volumes accelerated in Nov 23

According to the International Air Transport Association (IATA), global air cargo demand improved 8.3% yoy to reach 22.4bn cargo tonne-kilometers (CTKs) in Nov 23. This is the largest yoy increase since global air cargo demand returned to growth in Aug 23 following 17 months of yoy declines since Feb 22, even if current demand is 2.5% below the Nov 19 (pre-pandemic) level. We believe a similar growth rate is likely for Dec 23 given the gifting season, which should support revenue growth for SATS’s cargo business that made up c.49% of SATS’s revenue as of 1H24.

Global passenger demand almost back to pre-Covid levels

On top of the potential turnaround in cargo business, global passenger air travel demand reached 99% of the Nov 19 level in Nov 23. Changi Airport saw 10.3m passenger movements in Oct-Nov 23 (67% of 3QCY23), and we expect a strong Dec 23. As such, SATS’s ground handling and aviation food sub-segments should see revenue growth in 3Q23F on stronger seasonal travel. The latter is also likely to translate to higher qoq contributions from its associates and joint ventures in China, Japan, and Malaysia.

Valuation/Recommendation

Reiterate Add with a higher TP of S$3.44. We keep our estimates for FY24F-26F unchanged but lift our TP to S$3.44 due to lower WACC assumption of 9.9%, from 10.5% previously. We recognise that the low profit base could see volatility in earnings in the near term. The WACC reduction is due to a lower risk-free rate assumption of 2.5%, from 4.0%, given current SG 10-year government bond yield of 2.8% and rate cut expectations in 2HCY24F. Our TP implies FY3/26F P/E of 25x, 1 s.d. above its 2013-18 average, which we think is justified given its improving EBIT.

You can find the full report here and the company website here.