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ROE to return to 13-15% by 2025

  • We think SATS’s 3-year revenue target of S$3bn by FY25F is achievable, assuming a 100% pre-Covid travel recovery and successful M&A strategy.
  • SATS has reset its S$1bn investment/capex target over 3 years, a plan that was shared in its previous 2019 capital market day, but stalled by Covid-19.
  • Management is also cautiously optimistic that ROE could return to 13-15% by FY25F (FY16-19: c.15.4%) with potential lower margin trend in the near-term.
  • Execution and recovery are key. Maintain Hold and lower TP to S$4.32. SATS trades at 37x FY23F P/E, above its pre-Covid-19 c.26x in 2018.
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Non-travel revenue share set to rise to 35% vs. 14% pre-Covid

We think SATS’s 3-year revenue target of S$3bn by FY25 is achievable, assuming a 100% pre-Covid travel recovery and successful M&A strategy. SATS shared in its capital market day that the revenue target could comprise c.S$1.8bn from travel, S$300m-400m from non-travel and the rest from M&As (mainly non-travel). As such, SATS expects to see lower reliance from travel as revenue split for travel/non-travel will be 65%/35% (FY19: 85%/14%), and for gateway/food solutions will be 40%/60% (FY19: 54%/46%) by FY25. We assume SATS’s inflight catering revenue will recover to 99% of pre-Covid-19 levels by FY24F, hence the S$3bn target by FY25F seems achievable, in our view.

Reset of S$1bn investment target

Similar to its target set in the 2019 capital market day, SATS is resetting a total of S$1bn investment/capex target over the next 3 years, of which 60% will be spent in cargo and 40% in food solutions. The investment target includes S$200m-240m of maintenance capex (S$70m-80m p.a.) leaving c.S$800m for M&As. There is a strong pipeline of targeted assets. We believe India and China could still be key focus markets. Assuming a 2-year gestation and high single-digit returns expectations, an annual S$200m-250m p.a. of M&A could add up to S$20m of profit, or 6% to our FY24F EPS.

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Management is also cautiously optimistic ROE can return to 13-15% by FY25F (FY16-19: c.15.4%) but warns of a lower margin trend in the expansionary phase. We think the pressure could come from scaling up non-travel kitchens (high single-digit EBIT margin) that take time to reach optimal operating leverage or airlines squeezing service providers as they focus on returning to profitability. Aviation catering used to command mid-teens EBIT margin and this too requires time to recover as operating leverage improves.

What are the risks? DCF-TP reduced to S$4.32 on lowered EPS

We remove the DPS for FY22F as SATS guided that dividend is contingent on positive EBITDA and net profit, excluding grants. We think slower-/faster-than-expected border reopenings are the key risks/catalysts. For instance, there is a 6,000 Vaccinated Travel Lane (VTL) traveller limit into Changi, or only 8% of the pre-Covid level. Intermittent changes in quarantine orders globally could also prevent a smooth recovery.