1QFY23 results slightly below expectations on mounting cost pressures
<Results Analysis> 1QFY23 results slightly below expectations on mounting cost pressures
• 1QFY23 results came in slightly below expectations
• Robust turnaround in activity levels in the aviation segment was better than anticipated
• Operating margins improved sequentially in 1QFY23 but will require more time to turn positive
• Cut FY23F net profit estimate by 34.1%; lower TP slightly to S$4.30 to factor higher cost of capital
• Maintain HOLD with slightly lower TP of S$4.30
Our thoughts
1QFY23 results fell short of expectations.
SATS reported a net loss of S$22.5m in 1QFY23, a sequential improvement from 4QFY22 (net loss of S$26.8m) but was slightly behind the street’s full-year net profit projection of S$62.0m even after factoring a back-ended recovery. Barring government grants (1QFY23 should be the final quarter of government support), SATS would have booked a core net loss of S$31.9m.
Group revenue surged by 36.2% y-o-y and 25.4% q-o-q to S$375.5m, above our estimate of S$360.0m.
Growth was driven by the full contribution (S$32.4m) of Asia Airfreight Terminal (AAT) during the quarter (consolidated from March-22), and strong recovery in travel-related revenue which was partly tempered by a decline in non-travel revenue. Travel-related revenue grew by 83.8% y-o-y and 47.5% q-o-q on the back of a marked rebound in activity levels in tandem with the reopening of borders in Asia and other regions, with the number of flights handled up by 233% y-o-y to 55% of pre-pandemic levels, while cargo throughput increased by 53.2% y-o-y largely due to the consolidation of AAT. Meanwhile, non-travel revenue declined by 17.1% y-o-y and 8.9% q-o-q, primarily due to the negative impact of lockdowns in China on non-aviation food.
However, the group continued to report steep operating losses as cost pressures remain.
SATS achieved an operating loss of S$34.3m in 1QFY23, a modest improvement from 4QFY22 (operating loss of S$37.1m). Majority of cost items outpaced revenue growth during the period, in particular, staff costs, premise costs and other operating expenses surged by 82.6%, 53.1% and 58.0% on annual basis, largely attributable to the reduction of government grants, increase in headcount, and higher utility and fuel costs. Surprisingly, the cost of raw materials only grew modestly by 4.1% y-o-y despite a 13.4% increase in gross meals produced due to the success of SATS’s cost optimisation initiatives and a more favourable revenue mix (higher % of aviation food).
Solid improvement in contribution from associates and JVs.
SATS’s share of net profits from associates and JVs came in at S$6.9m in 1QFY23, as compared to negative contribution of S$1.2m in 1QFY22. SATS’s associates and JVs in the food solutions segment were close to breakeven during the period, while units in the gateway services segment continued to report solid results.
Cut FY23F net profit estimates to factor cost headwinds; trim TP to S$4.30 and maintain HOLD.
We are raising our FY23F revenue projection slightly by 3.8% to reflect a more pronounced recovery in travel-related revenue as significant pent-up travel demand continues to be released over the short-term. However, we are lowering our FY23F net profit estimate by 34.1% to reflect narrower operating margins owing to stronger-than-expected inflation woes. Additionally, we are lowering our TP slightly to S$4.30 as we assume a higher cost of capital (7.0% WACC vs 6.5% previously) in our discounted cash flow valuation.
