Taking a breather for now
4QFY22 results were below expectations. SATS returned into the red again in 4QFY22, with a core net loss (excluding revaluation gains and PPE impairment losses) of around S$10.6m (vs. core net profit of S$5.1m in 3QFY22 and S$13.2m in 4QFY21). Full-year core PATMI amounted to S$18.4m, missing the street’s projection of S$34.4m.
Operating losses widened in 4QFY22. SATS booked an operating loss of S$37.1m for the quarter, as compared to an operating loss of S$9.5m in the previous quarter. This was primarily attributable to a steep increase in staff costs (+19.3% q-o-q), driven by an increase in the employee headcount and fading wage subsidies. Other cost components were still fairly stable during the quarter, rising in tandem with revenue.
Revenue was up 7.5% y-o-y, but down 2.7% q-o-q to S$299.5m in 4QFY22. Weaker sequential top-line performance in the period was led by a decline across both the food solutions (-1.4% q-o-q) and gateway services (-3.8% q-o-q) segments, as the group saw a decline in cargo volumes (-10.9% q-o-q) and softer non-aviation meal volumes. Travel-related revenue grew 5.4% q-o-q, as travel activity gained momentum during the quarter, with the number of flights and passengers handled climbing by 24.4% and 37.7% q-o-q. Meanwhile, the number of gross meals (+1.5% q-o-q), which encompasses both aviation and non-aviation meals, did not grow in tandem with passengers handled due to drag from lockdowns in China and relatively stronger momentum in Malaysia (larger proportion of domestic flights and SATS does not have an aviation catering subsidiary in Malaysia).
Operating costs will likely grow faster than revenue over the next few quarters. While SATS’s revenue will likely stage a solid rebound from 1QFY23, with Singapore’s new Vaccinated Travel Framework and the synchronised reopening of countries in the region, costs could outstrip revenue growth for a while due to several reasons. Firstly, staff costs will increase significantly because SATS has to restore manpower supply prior to the return of demand due to time required for training new employees (typically three to six months), wage inflation pressures (due to a tight labour market), and the absence of wage subsidies (S$145.6m in FY22). Secondly, the group will have to deal with higher food costs, which have risen by 20%-30% this year. While SATS has multiple levers to control its raw material costs, we believe that the group may have difficulties passing on any increased costs to its consumers. Consequently, the management has guided that operating costs will likely outpace revenue growth over the next two quarters at least, before reversing this trend towards 4QFY23F.
Negative earnings revisions; downgrade to HOLD with lower TP of S$4.50. We are slashing our FY23/24F net profit estimates by 53% and 10%, respectively, to reflect the abovementioned cost headwinds. Consequently, we are lowering and rolling forward our P/E peg to 30x blended FY23/24F net profit (from 35x FY23F net profit previously) to arrive at a lower TP of S$4.50. SATS has outperformed most other aviation plays this year, notching a YTD gain of 12.6%, despite the retreat in its share price post its results, and we believe that the stock is now fairly priced at 22-24x FY24F earnings. Furthermore, dividends will likely only be reinstated in FY24F, which is when we anticipate the company to convincingly return into the black. Accordingly, we are downgrading our recommendation to HOLD, and would recommend investors accumulate on dips or rotate into other reopening plays that are better positioned to deal with rising inflation like Singapore Airlines and ST Engineering.