Despite posting its worst full-year results on May 27, shares of in-flight caterer and aviation services provider Sats have traded higher.

The stock climbed 2.6% to close at $3.96 on June 3, translating to a gain of 53.5% from the 2020 trough of $2.58. However, the stock is still down 13.2% from its year-to-date high of $4.56.

Part of the market’s confidence in Sats could be due to expectations of a continued consecutive q-o-q improvement in the company’s performance. Alex Hungate, CEO of Sats, points out that the company’s net loss of $43.7 million in 1QFY2021 ended June 2020 had narrowed to $33.2 million in 2QFY2021. Subsequently, the company recorded earnings of $2.8 million in 3QFY2021, which further improved to $800,000 in 4QFY2021.

Even Sats’ loss before interest, taxes, depreciation and amortisation (lbitda) and ebitda — important proxies for cashflow — reveal a similar pattern. The company had swung from a lbitda of $33.9 million in 1QFY2021 to ebitda of $20.5 million in 2QFY2021, before improving further to ebitda of $39.5 million in 3QFY2021 and $46.2 million in 4QFY2021.

But overall, Sats swung into a net loss of $78.9 million in FY2021 ended March, from earnings of $168.4 million the year before. Excluding one-off impairments incurred in the financial year, the net loss would have narrowed to $23.9 million. Without government relief, however, the net loss would have widened to $320.8 million.

The company’s total revenue halved to $970 million on the back of significantly lower contributions from all segments. Notably, revenue from food solutions and gateway services contracted 46.4% y-o-y and 55.1% y-o-y respectively to $573.8 million and $389.7 million.

These, however, were mitigated by revenue contributions from newly consolidated entities, namely Country Foods, Nanjing Weizhou Airline Food Corp (NWA) and Monty’s Bakehouse UK (MBUK), amounting to $118.9 million.

Unsurprisingly, Sats’ poor results were the result of low activity, no thanks to the Covid-19 pandemic. During the year, the company handled about 55,100 flights and 4.1 million passengers, as well as served 43.7 million meals. These were starkly lower compared to last year when it handled 351,400 flights and 84.6 million passengers, as well as served 82.5 million meals. Cargo handling, bandied as a bright spot by the industry, too, was down to 1.2 million tonnes from 1.8 million tonnes the year before.

Given how air travel across the world has been hit, the share of results from the company’s regional associates and joint ventures also did not help. The item recorded a loss of $48 million from earnings of $11.8 million the year before, as the Covid-19 pandemic impacted their performance “substantially”.

Fortunately, the company was able to keep total expenditure down 42.9% y-o-y to $980.1 million. This accounted for lower staff costs, which decreased $497.2 million mainly due to government reliefs and workforce reductions in line with the management of lower aviation volumes. Raw material costs also reduced due to the decrease in aviation volumes.

Company premises and utilities expenses also came in lower, thanks to company-wide cost containment measures. However, depreciation and amortisation rose $12.8 million mainly due to new investments, newly acquired systems and an increase in right-of-use (ROU) assets last year.

Growing cargo handling volume

No doubt, 2020 was a disastrous year for Sats — like many other companies that operate in the aviation industry. Airlines, plane manufacturers, and maintenance, repair and overhaul (MRO) service providers have been hit hard, too, by the closure of borders necessary to slow the spread of Covid-19.

Even now, the pandemic continues to wreak havoc. Already, subsequent waves of the pandemic are hitting many parts of the world. Countries that previously had Covid-19 under control, including Singapore, have now re-implemented strict measures to contain new cases. The much-touted Singapore-Hong Kong Air Travel Bubble (ATB) has been delayed, yet again.

The mutation of the coronavirus could also make containment harder. Some variants are reportedly more infectious than the original strain, which could accelerate the number of cases ahead.

The key solution, obviously, is to vaccinate people as quickly as possible given that the existing Covid-19 vaccines are reportedly still effective against these variants. However, the uneven roll-out — due to supply shortages, politics and other reasons — is not helping.

As such, Hungate warns that the aviation industry, and by extension Sats, will not see a straight-line recovery. “Covid-19 variants continue to create uncertainty over the reopening of international borders and delaying the rebound of international travel,” he says at the company’s FY2021 results briefing on May 27.

Nevertheless, Sats will continue to grow other revenue streams, points out Hungate. For one, the company will continue to grow its cargo handling volumes by focusing on e-commerce, which has become a big driver in recent times.

E-commerce cargo, he says, is a higher value product compared to general cargo given that it can command a premium. Apart from space in the belly of the plane, the premiumisation is partly attributed to the ability to track e-commerce packages in real time, he explains. “Those data are taken by the DHLs of the world. So, customers can track and trace their packages,” he says.

Not only is Sats keen to add capacity, but the company also intends to install automated sorting capabilities at its cargo handling facilities in airports. By doing so, the turnaround time is faster and double inventorying can be avoided, Hungate says.

“For all the e-commerce players that don’t have their own sortation facilities in Singapore, or perhaps not even in Southeast Asia, that will allow us to target new segments of some of the brand owners that go direct to consumer, and also across the ubiquitous e-commerce platform,” he says.

Hungate also expects the transportation of vaccines, which falls under cargo handling, to be an “important” contributor although it is a “relatively small part” of the cargo business. The transportation of vaccines may increase depending on the progression of the pandemic. “We may need additional regimens, probably on an ongoing basis,” he says.

Hungate hints that Sats could be announcing some acquisitions going forward as the company has a pipeline of “attractive” targets. He notes these transactions could have been executed earlier if not for the delay in due diligence owing to the constraints of the pandemic.

The company should not face any problem in financing such transactions. As at March 31, the company has net cash of $201 million.

Long-term optimism

Meanwhile, analysts are not quite optimistic on Sats in the short term although they say the long-term outlook is bright.

UOB Kay Hian says although Sats’ sequential improvement in earnings and strong cash generation are “key positives”, the latter was mainly due to government grants. The brokerage points out that the company’s full-year loss would have widened without the government grants.

Given that borders continue to be largely closed, Sats could face more challenges as government grants are estimated to decline at least 60% y-o-y in FY2022. Moreover, UOB is “concerned” about margins on inflight meals as well as inflationary cost pressures.

The brokerage has lowered its FY2022 earnings forecast for the company by $132 million to factor in slower border openings and higher raw material costs.

“We do not expect earnings to improve to pre-pandemic levels until after FY2024,” UOB analyst K Ajith writes in a note dated May 28. UOB has maintained its “hold” rating for the stock with a lower target price of $4.09 from $4.27 previously.

Similarly, DBS Group Research is “less sanguine” on Sats’ near-term prospects given the likely “measured” pace in the reopening of borders in Asia. The gradual reopening of borders, it says, is due to the resurgence in Covid-19 cases driven by new variants and an “uninspiring” pace of vaccination in the region.

As such, DBS has cut its FY2022/F2023 earnings forecasts by 58%/7% to reflect the near-term headwinds. Nevertheless, the brokerage has kept its “buy” call for the stock with an unchanged target price of $4.50.

“While there is still some uncertainty on Sats’ recovery trajectory, we continue to like Sats as a key vaccine beneficiary given its pole position in an attractive market like Singapore and broader presence in the fast-growing Asia aviation market,” DBS analyst Jason Sum writes in a May 28 report.

CGS-CIMB Research believes the general border reopening in Singapore is likely to be pushed back to early-2022, from end-2021 which it previously reckoned. However, the brokerage says the recent dip in Sats’ share price is a “buying opportunity”.

CGS-CIMB notes that the company secured several new contracts with government agencies, including Singapore’s Defence Ministry and Home Affairs Ministry. The company also expanded some of its auxiliary security services to commercial sectors. These contracts typically range two-to-three years, sustaining the revenue base for Sats and somewhat buffering the uncertainty in the aviation sector, it says.

Moreover, Sats grew its food services (ready to-eat meals) with more partnerships with SMEs in Singapore. Hence, Sats is “not a sitting duck”, CGS-CIMB’s head of research Lim Siew Khee writes in a May 27 report. CGS-CIMB has retained its “add” recommendation for the stock with an unchanged target price of $4.30.