Recovery affected by near-term cost drag
? SATS reported 4Q22 core net loss of S$26.8m, dragging FY22 into core net
loss of S$8.5m, missing the net profit forecast by us and consensus.
? Losses were a result of negative jaw as SATS started gearing up
operationally ahead of a recovery in the aviation industry by CY23.
? Reiterate Add with a higher DCF-based TP of S$4.88 (WACC: 7.0%) as we
roll forward our assumptions and introduce FY25F estimates.
Cost run-up to position for demand recovery
4Q22 core net loss of S$26.8m w as driven by operating loss of S$37.1m as the huge stepup in operating expenses by 31.5% yoy to S$336.6m outpaced the modest revenue growth
of 7.5% yoy as it raked in revenue of S$299.5m for the quarter. Higher opex w as driven
by: (1) higher staff cost due to increased headcount and w age inflation, as w ell as (2)
inflationary pressures resulting in higher prices for raw materials, utilities and fuel. Cost
pressures w ere further compounded by low er government relief of S$18.4m in 4Q22
compared to S$51.2m a year ago. How ever, w e feel that the pre-emptive increase in
headcount is essential for SATS due to the lead time required for training given that
passenger traffic in Singapore Changi airport returned to c.40-50% of pre-pandemic levels
as of May after Singapore drastically relaxed its border measures in April.
All hands on deck to manage cost
Despite the aggravating cost conditions that are likely to persist into 1HFY3/23, the
management has said that it is monitoring the run rate of its costs. Within the food solutions
segment, SATS is exploring measures, such as new menu items and recipes as w ell as
ingredient substitution apart from passing on cost, to manage rising raw material costs.
Maintaining financial prudence to support growth
No dividends w ere declared as SATS remained committed to its previous guidance for
resumption of dividends only after the company returned to profitability w ithout government
relief. Its healthy cash position of S$786.0m w ith net cash of S$275m as of FY22 w ill also
allow SATS to follow through w ith its S$1bn capex and new investment target aimed at
grow ing the company’s revenue to S$3bn by FY25F that w as guided in its capital markets
day back in November 2021. SATS is driving capacity expansion of its food solutions
business in India, China and Thailand to serve the non-aviation segment w hile expanding
cargo exposure through an increase in its stake in Asia Airfreight Terminal (AAT).
Reiterate Add with higher DCF-based TP of S$4.88
We revise our FY23/24F earnings dow nw ards by 21.3%/11.1% on cost pressures but our
DCF-based TP (WACC: 7.0%) is higher on SATS turning profitable in FY23F on the back
of recovery w ithin the aviation sector, for w hich w e estimate traffic to return to c.70% of
pre-pandemic levels by CY22. Re-rating catalysts: sw ifter recovery of aviation sector and
successful execution of M&A plans. Dow nside risks: subdued travel demand post initial
deferred demand and inability to pass through costs.