1QFY23: Results In Line; Recovery Has Started But Still In Low Gear
SATS’ 1QFY23 ex-relief core net loss of S$31.9m (modest improvement over 4QFY22 loss of S$42.5m) was within our expectations. The rising labour cost from the workforce ramp-up in preparation of the business recovery would continue to weigh on SATS’ near-term financial performance. However, its core losses should narrow in 2QFY23 and we expect SATS to return to core profitability in 3QFY23 as its business volume continues to recover. Maintain BUY with an unchanged target price of S$4.20.
• Results in line, ex-relief core net losses narrowed slightly. SATS’ 1QFY23 ex-relief core net loss of S$31.9m (4QFY22: S$42.5m loss) was in line with our expectations. Revenue rose 25.4% qoq (36.2% yoy) to S$375.5m, on the back of air travel recovery and the additional S$32.4m revenue from Asia Airfreight Terminal (AAT, whose financial reporting has been consolidated post acquisition of additional stake in late-Mar 22). Total opex rose 21.7% qoq (50.6% yoy) to S$409.8m. Staff costs were the biggest cost driver, rising 25.2% qoq (82.6% yoy) due to increased headcounts and lower government grants.
• Increase in travel-related revenue partly offset by decrease in non-travel. Excluding the contribution of AAT, travel-related revenue rose 29.7% qoq (61.7% yoy) to S$237.3m (about 55% of pre-pandemic levels by our estimate), driven by higher revenue from both inflight catering and gateway services. However, the revenue increase from the travel-related businesses was partly offset by the lower revenue from non-travel businesses (non-aviation food and security services), which declined 8.9% qoq (17.1% yoy) to S$105.8m due to the cessation of certain COVID-19-related services after Singapore reopened.
• Balance sheet remained healthy. SATS maintained a net cash of position of S$252m as at end-1QFY23, equivalent to 14% of its net asset base or 5.6% of its market cap.
• Cost pressure would continue to weigh on near-term performance… Since the start of 2022, SATS has been proactively ramping up its workforce ahead of the business volume recovery. This has caused some mismatch between revenue and cost. According to management, SATS has recovered its headcount to about 80% of the pre-pandemic levels ytd. While this should be more or less sufficient to support the level of air travel recovery towards the end of 2022 (given that Singapore Airlines recently announced its plan to restore its pax capacity to 81% of the pre-pandemic levels by Dec 22), management noted that in preparation for a further recovery in 2023, SATS would continue the recruitment for the rest of 2022.
• …but profitability should improve gradually as business recovery catches up. After the modest improvement in 1QFY23, we expect SATS’ ex-relief core net losses to continue to narrow in the upcoming 2QFY23. We believe that SATS’ core profitability is likely to return to the positive territory in 3QFY23 (ie the Oct-Dec 22 quarter), when air traffic in Singapore is expected to have returned to close to 80% of the pre-pandemic levels.
• SATS needs scale for its profitability to see a full recovery, and China is the biggest uncertainty. We note that SATS’ profitability is highly sensitive to scale, as scale gives SATS scope to optimise its resources and hence harvest operation efficiencies. Due to this reason, SATS’ profitability recovery is likely to see the highest delta towards the last mile of the recovery journey, in our view. This explains the 26% discrepancy between our FY24 net profit forecast of S$154m vs consensus’ forecast of S$208m. China (historically contributing to about 11% of air traffic in Singapore) is still in a largely lockdown state today and has no timeline of opening up. Given our belief that the opening up of China’s borders (when it happens) would be a gradual and orderly process (so that the society can adjust and its medical resources can accommodate), we are still looking at FY25 (CY24) as the year that SATS’ profitability can possibly recover to pre-pandemic levels.
• We adjust our FY23 net profit forecast to S$64.5m (previously: S$49.9m) to reflect a one-off gain from the disposal of a 49% stake in Brahim’s SATS Investment Holdings (BSIH). Our FY24-25 net profit forecasts are largely intact.
• Key risks for SATS include air travel recovery losing steam beyond 2022 (possibly due to a recession) and SATS failing to pass down cost pressures to its customers.
• Maintain BUY with unchanged DCF-based target price of S$4.20. Our target price implies a FY25F PE of 17.8x, which is 0.7SD below SATS’ historical average forward PE of 19.9x in the normalised years FY14-19). Given our belief that SATS would be still lossmaking in the near term, we recommend investors to accumulate SATS on share price weaknesses.
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• Catalysts for SATS include faster-than-expected earnings recovery and relaxations of travel
restrictions in key Northeast Asian markets including China and Japan.