Still not the time to go long
1QFY23 results slightly below expectations on cost pressures
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 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.
Excluding AAT, travel-related revenue grew by 60.5% y-o-y and 28.8% 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. The number of flights handled were up by 233% y-o-y to 55% of pre-pandemic levels in 1QFY23, 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 (staff, premises and other operating costs) 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 an 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; trimmed 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.