SATS Ltd (SATS SP) – Near-term cost pressure
- PATMI loss of SGD22.5m in 1QFY23
- Higher operating expenditure outpacing the growth in revenue
- Recovery is expected to accelerate in 2HFY23
Recovery underway but impacted by lingering cost pressure
SATS’s 1QFY23 revenue rose 36.2% YoY to SGD375.5m, mainly driven by the recovery in the travel segment and consolidation of ATT, partially offset by the non-travel segment (-17.1% YoY) due to the cessation of contracts from Singapore’s quarantine facilities business. Despite the growth in revenue, operating expenditure rose 50.6% YoY to SGD409.8m, largely due to higher staff costs and lower government reliefs. As such, 1QFY23 PATMI came in at a loss of SGD22.5m, as compared to a gain of SGD6.4m in 1QFY22, partially offset by higher share of profit from associates/JVs. Excluding the impact of government reliefs of SGD11.3m, PATMI would have been a loss of SGD31.9m (narrowed by 25% quarter-on-quarter (QoQ)).
Ramping-up hiring to support operations
Number of employees increased 33% YoY to 14.6k in 1QFY23 (80% of its pre-Covid levels), partly due to the consolidation of ATT as well as hiring to support passenger operations and meal production ahead
of a full recovery. We expect further increase in number of employees as SATS invests ahead to prepare for future recovery in Singapore and China, together with expansion of food business overseas, though hiring could be partly offset by higher productivity and cross-training programmes of employees. Note that Changi Airport’s Terminal 4 will resume operations in Sep 2022 and southern wing of the Terminal 2 departure hall will also reopen in Oct 2022. Given the impact of inflationary pressure, SATS is working to pass on part of its higher raw materials costs to their customers and is flexible to substituting different and cheaper raw materials for their meals.
Operating statistics continued to improve
SATS’s operating statistics continued to improve in 1QFY23. On a QoQ basis, SATS’s flights handled improved by 24.3% QoQ while passengers handled grew 95.7% QoQ. Separately, meals served rose 4.4% QoQ. Cargo demand remained strong with volumes increasing 45.2% QoQ. SATS is currently handling 50% of its pre-Covid volume. Management expects the number to ramp-up to 80% by Dec 2022 where
SATS is able to reach break-even and enjoy operating leverage. We expect the recovery trajectory to continue and see a stronger recovery in 2HFY23, but cost pressures to linger in 2QFY23. Factoring higher operating costs, we revise our estimates and hence decrease our fair value estimate from SGD4.94 to SGD4.72.
SATS’s ESG rating was downgraded in Mar 2022, largely due to the weakness in SATS’s governance practices, specifically board structure. In addition, SATS lags peers on business ethics practices such as
conducting compliance audits and limited evidence of environmental protection efforts. SATS outperforms its peers on social issues, with lower exposure to risk of accidents as it operates in Singapore, where data indicates accident rates are low. SATS also has strong health and safety policies, which are reinforced with audits, and certified operation standards. BUY. (Chu Peng)