<Results First Take!> SATS Ltd (SATS SP): 4QFY22 Results below expectations
- 4QFY22 results were below expectations as SATS returned into the red again, with a core net loss of S$26.8m (vs core net profit of S$5.1m in 3QFY22 and S$13.2m in 4QFY21).
- Revenue was up by 7.5% y-o-y but down 2.7% q-o-q to S$299.5m in 4QFY22. Weaker sequential performance was due to a decline in non-travel revenue (decline in non-aviation meals and cargo volumes).
- SATS booked steeper operating losses of S$37.1m in 4QFY22 (vs operating loss of S$9.5m in 3QFY22) due to a decline in revenue and marked increase in staff costs (+S$27.1m q-o-q).
- Contribution from associates and JVs fell to S$4.1m in 4QFY22, down from S$12.1m in 3QFY22 due to the softer performance of its cargo associates/JVs.
- We currently have a BUY call and TP of S$4.90 on the stock, more updates to follow after the analyst briefing tomorrow.
Highlights
- Despite the Omicron wave in early 2022, the number of flights handled surged by 24.4% q-o-q in 4QFY22 due to the synchronised reopening of borders in the region.
- Similarly, the number of passengers handled by the Group soared by 37.7% q-o-q to 5.0m in 4QFY22.
- However, the number of gross meals produced only grew marginally by 1.5% sequentially, despite the significant increase in passengers handled due to a decline in non-aviation meals owing to lockdowns in China.
- Gateway services revenue fell by 3.8% q-o-q and despite the increase in flights, due to a less favourable revenue mix (increase in domestic flights with a lower charge per flight) and a drop in cargo volumes (-10.9% q-o-q).
- Core net losses (excluding government grants) would have come in at S$42.5m in 4QFY22, which is worse than 3QFY22 (core net loss of S$33.0m) due to SATS’s weaker operating performance and softer contribution from its associates/JVs during the period.
- SATS remains at an enviable net cash position of S$275m, with a debt/equity ratio of 0.5x as of Mar-22.
Our thoughts
- Recovery in the travel segment will likely see stronger traction over the coming quarters given solid progress on the reopening front in the region and globally, but we foresee several cost headwinds on the horizon impeding earnings recovery in the near-term.
- While SATS will enjoy significant economies of scale as volumes continue to trend higher, cost pressures will continue to exert stress on SATS’s operating margins in the near-term.
- Not only does SATS has to hire a considerable amount of staff in advance to prepare for the imminent surge in demand, the company will also need to overcome tapering government grants and wage inflationary pressures (due to a tight labour market).
- Additionally, food costs are likely to remain elevated in the near-term due to protracted supply disruptions and buoyant demand.
- SATS’s YTD share price performance has outperformed related aviation names; it may be prudent to take profit and consider rotating into other names like SIA and ST Engineering that are better positioned to deal with rising inflation.