3QFY22 results broadly in line with expectations
<Results Analysis> SATS Ltd (SATS SP): 3QFY22 results broadly in line with expectations
- 3QFY22 core PATMI came in at S$5.1m (-25.0% q-o-q, -37.8% y-o-y), bringing 9MFY22 core PATMI to S$18.3m. Barring a one-time receivable impairment of S$10.7m, core PATMI would have amounted to S$29.0m, accounting for 81% of consensus’ full-year projection.
- Revenue was up by 4.7% q-o-q and 22.6% y-o-y to S$307.8m in 3QFY22, driven by an improvement in travel revenue (+11.6% q-o-q) but weighed down by non-travel revenue (-3.3% q-o-q).
- SATS booked operating losses during the quarter as operating costs outpaced revenue growth, primarily due to lower quantum of government relief and a S$10.7m write-down of receivables owing to the bankruptcy of Genting HK.
- Contribution from associates and JVs grew to S$12.1m in 3QFY22, up from S$2.1m in 2QFY22 due to continued strength among cargo associates.
- Announced acquisition of additional 16.4% stake in associate Asia Airfreight Terminal (AAT) for S$59.6m, which will be consolidated from 1QFY2023
- We currently have a BUY call and TP of S$4.90 on the stock.
Highlights
- Number of flights handled surged by 109.7% q-o-q due to the opening of interstate travel in Malaysia, and VTLs coming into effect during the quarter.
- Similarly, the number of passengers handled by the Group skyrocketed by 301.1% q-o-q to 3.6m in 3QFY22.
- However, the number of gross meals produced dipped by 3.4% sequentially, despite the significant increase in passengers handled due to a decline in non-aviation meals owing to sporadic COVID-19 flare-ups in China.
- Disconnect between growth in gateway services revenue (+7.7% q-o-q) and flight volumes (+109.7% q-o-q) is due to a less favourable revenue mix (increase in domestic flights with a lower charge per flight) and license fee rebate adjustments during the quarter. These adjustments have no impact on the bottom line as they simultaneously reduce both revenue and license fees.
- Core LATMI (excluding government grants) would have come in at S$33.0m in 3QFY22, slightly higher than S$30.1m in 2QFY22; government grants are expected to gradually taper off over the next two quarters.
- Price paid for the acquisition of additional shares in AAT appears favourable at an implied trailing P/E of around 16.6x.
- Recent changes to minimum salary criteria for foreign labour is not expected to have a meaningful impact on SATS’s employee costs.
- SATS remains at an enviable net cash position of S$135m, with a debt/equity ratio of 0.5x as of Dec-21.
Our thoughts
- Inflation may pressure operating margins in the near-term as there will be challenges passing on costs to customers given the delicate recovery in the sector. However, we believe that this should be manageable. Apart from enjoying greater economies of scale as volumes normalise, SATS still has some levers to pull, including using cheaper substitute proteins for meals and focusing on offering more value-added services.
- Staff costs will likely raise at a faster clip compared to revenue over the next few quarters due to the absence of government grants, wage inflation, and as SATS has to hire more manpower in anticipation of demand returning.
- Recently implemented and newly established VTLs are expected to progressively boost traffic volumes at Changi; easing of both domestic and international border controls among countries like Malaysia, the Philippines, Vietnam and India will drive improvement in SATS’s international operations.
- Cargo revenue is projected to sustain healthy growth in the near-term due to continued global supply chain disruptions, and e-commerce and cold chain tailwinds.
- Robust balance sheet will enable the Group to undertake more acquisitions in the short-term to stimulate stronger earnings momentum.
- Project net earnings to reach near pre-crisis levels in FY24F, for an implied 161% CAGR between FY22-24F.