Cost pressures while awaiting travel return
? 3QFY22 net profit of S$5.1m was in line with our estimate but below consensus due to an exceptional c.S$10m in bad debt provision.
? Staff cost pressures mitigated by recovery in associates’ contribution but cost impact likely to creep up in the near term before recovery in sales.
? Reiterate Hold with revised DCF-based TP of S$4.34 as we await better earnings clarity when government support ceases and travel normalises.
Operational improvement weighed down by costs
Revenue for 3QFY22 w as in line at 99.8% of our estimate but an increase in operating expenses as a result of higher staff costs as well as other operating expenses, which included a one-off bad debt provision of c.S$10m during the quarter attributed to a single account, pushed SATS back into EBIT losses territory. Without the one-off provision, SATS maintained a stable qoq operating profit breakeven level. How ever, the unexpected improvement in gateway associates’ contribution of S$15.1m in 3QFY22 (+S$8.6m yoy/+S$10m qoq) allow ed SATS to achieve PATMI of S$5.1m, the fourth consecutive quarter of profitability.
Tapering government grants extenuate staff cost pressures
Staff costs in 3QFY22 continued to track higher against our estimate (+8% vs. estimate) as staff count crossed 12k from 11k the previous quarter in accordance with higher volume of activities and heightened safety measures within the airports. Management is expecting hiring to continue as it ramps up operational capabilities in anticipation of the return of aviation business by the end of CY23. Furthermore, with wage inflation and a tapering of government grants by 1QFY23, we could see short-term cost pressures from wages.
Associates’ contribution well on recovery
Associates’ contribution for 3QFY22 saw strong business momentum, contributing S$12.1m (+S$8.6m yoy/+S$10m qoq), thanks to improvement in gateway associates’ businesses in Indonesia and India. Given that the gateway business has benefitted from the maturing of e-commerce globally during the pandemic, we think that share of gateway associates’ business could continue to deliver stable and sustained contribution. We have thus pencilled in greater contribution from associates in FY23.
Reiterate Hold; awaiting net profit turnaround
This report marks a change in covering analyst. We reiterate our Hold call with a revised DCF-based TP of S$4.34, adjusting FY22F/23F/24F EPS by +15%/-1%/+4% on account of higher associates’ contribution in FY22F and cost pressures from ramping up operations in FY23F in anticipation of travel fully normalising in FY24F. We expect travel to come back in a bigger way only by 4QCY22 (i.e. 3QFY23), allow ing SATS to achieve net profit without government grants, which should also mark the resumption of dividends. Upside risks include news of swifter resumption of unrestricted travel while downside risks include persistence of rising cost conditions.