Recovery intact; but costs hurt for now
- 1QFY3/23 core net loss of S$22.5m missed our net profit estimate for the quarter as operating cost increases outstripped revenue recovery.
- We expect recovery of the aviation industry to gradually offset cost pressures, with return to profitability delayed till 3Q23F.
- Reiterate Add but DCF-based TP lowered to S$4.47 (WACC: 7.0%), with short-term weakness expected before operating leverage sets in.
Operational recovery suggests robust demand
SATS’s revenue grew 25.4%/36.2% qoq/yoy to S$375.5m in 1QFY3/23 with recovery within the aviation industry underway. Revenue was in line at 20.4% of our FY23F estimates, as momentum of revenue recovery is expected to improve given more extensive border reopening only in the latter part of 2QCY23. We estimate that SATS’s in-flight meals, a proxy for recovery within the aviation industry, returned to 52% of pre-Covid levels in 1Q23F (Fig 2) and will reach 83% by the end of CY23F, tracking passenger traffic forecasts by International Air Transport Association (IATA).
Cost overrun hurt pace of recovery in the near term
Opex grew 20.1%/52.6% qoq/yoy, largely due to higher staff costs, which increased 82.6% yoy. Headcount increase from 11k a year ago to 14.6k as well as lower government relief exacerbated staff cost pressures. We expect headcount to rise beyond the previous peak of c.17k during pre-Covid levels by 3QFY23F, due to the need to hire ahead of demand recovery and incremental headcount from Asia Airfreight Terminal’s (AAT) acquisition. Other operating expenses climbed 21.7% qoq on higher professional fees and fuel cost and lower grant quantum. Cost of raw materials, however, declined from 45% of food solutions’ revenue in 4Q22 to 40.8% in the past quarter, suggesting better cost passthrough for the segment and we expect margins to hold at c.40% moving forward.
Weaker contributions from AAT consolidation
Management shared that AAT’s contribution in 1Q23 was negligible as border restrictions in Hong Kong led to a sluggish performance for the quarter while incremental costs contributed to higher staff costs, depreciation expenses and other operating expenses. There could be a revenue upside from AAT, as management shared that AAT contributed c.S$30m of revenue in the first quarter, compared to S$152m for the whole of FY22.
Reiterate Add with lower TP of S$4.47 on near-term weakness
We cut our FY23F EPS by 64.4% due to the cost ramp-up in the near term. Our FY24F/25F EPS is trimmed by a lower 14.5%/7.0% as revenue momentum suggests recovery of the aviation industry is underway, even though some margin pressure could linger. We expect losses to narrow more significantly in 2Q23F and see a return to profitability in 3Q23F, supported by seasonality factors. Upside risks include an early China reopening as well as acquisitions of earnings-accretive businesses; downside risks include delayed reopening of China and potential recession woes weighing on travel demand.