Earnings inflection is right around the corner
- 3QFY22 core PATMI broadly in line with expectations
- Broad improvement in activity levels, albeit from a low base
- Inflation pressures are manageable; operating margins to widen on greater economies of scale as volumes normalise
- Maintain BUY with unchanged TP of S$4.90
Investment Thesis
Greater clarity on travel resumption. Over the past few months, many countries in Asia Pacific have started or shared roadmaps to fully open their borders. Singapore is also making solid progress on this front, having established vaccinated travel lanes with 25 countries as of mid-February.
Resilient cargo demand and rapid growth in non-aviation food business to propel recovery. Robust demand for air cargo, underpinned by strong e-commerce, perishables, and pharmaceutical product (including vaccines) volumes, coupled with its pivot to non-aviation food channels, should accelerate SATS’s recovery. We project non-travel revenue to grow at a 10-15% CAGR over the next three years.
M&A could lead to positive earnings surprise. SATS has an enviable net cash position of S$135m as of 3QFY22, which would enable the company to capitalise on M&A opportunities. SATS has spent S$81m on acquisitions in the past six months and could share good news on this front soon.
Valuation:
Blended DCF and PE valuation methodology. Our TP of S$4.90 is based on the average of: (i) discounted cash flow (DCF) valuation (6.5% weighted average cost of capital [WACC] and 3.0% terminal growth [TG]), and (ii) price-to-earnings (PE) valuation pegged to peers’ at 25x FY23F PE.
Where we differ:
Our earnings projections are higher than consensus as we have pencilled in a faster pace of reopening in Asia Pacific.
Key Risks to Our View:
Resurgence of COVID-19 in the region, slower-than-anticipated vaccine rollout or international travel restrictions take longer than expected to loosen.