Focus on cashflow after P&L turnaround
- SATS returned to profitability in 2QFY3/24, with a core PATMI of S$16.8m, ahead of our expectation of a c.S$10m net loss.
- The return to profitability was due to better operating leverage in 2QFY24, with qoq revenue growth of 7.0% and stronger contribution from its SoAJVs.
- Upgrade to Add, with a higher DCF-based TP of S$3.00 (WACC: 10.5%), as stronger revenue momentum should sustain profitability, in our view.
Strong turnaround to profitability in 2QFY3/24
SATS recorded a core PATMI of S$16.8m for 2QFY24 on better operating leverage qoq, as revenue grew 7.0% qoq, outpacing opex growth of 4.5% qoq. Its 12.9% qoq lower depreciation and amortisation expense was a result of ongoing determination of intangible assets and goodwill from a purchase price allocation (PPA) exercise, as a result of SATS’s acquisition of Worldwide Flight Services (WFS). Although staff costs had grown 4.8% qoq, we note that staff count had declined marginally by 0.7% qoq, suggesting that SATS has reached an optimal level of staffing. Contributions from its share of associates and joint ventures (SoAJVs) also improved 8.5% qoq to S$23.1m in 2QFY24, as countries such as China and Japan, where SATS serves the aviation catering market, continues to recover.
Recovery in food solutions to drive near-term growth
SATS’s food solutions segment, which had reported EBIT losses since 2QFY22, reported an EBIT of S$2.7m in 2QFY24, with an EBIT margin of 1.0%. We think the continued recovery in the aviation industry would drive meals served on flights for SATS, resulting in the segment’s EBIT margins reverting towards FY18-20’s average of 14.7% by FY25F.
Keep an eye on cash management
Despite returning to profitability in 2QFY24, we note that SATS reported an operating cash outflow of S$10.0m in the quarter. Furthermore, there was an additional S$112.2m in repayment of lease liabilities in 2QFY24 (up from S$78.5m in 1Q24), which was partially offset by a S$63.3m increase in proceeds from borrowings. Nevertheless, with a cash balance of S$515.9m at end-2QFY24, we think that there is scope for SATS to pay down some of its borrowings from its acquisition of WFS.
Upgrade to Add; a sustained turnaround expected
As we enter the year-end travel season, we see better quarters ahead for SATS. We increase our FY24F EPS by 121.2% as SATS had returned to profitability one quarter ahead of our expectations, while revising our FY25F and 26F EPS upwards by 49.0% and 22.4%, respectively, as we see better operating leverage. Upgrade to Add from Hold, with a higher DCF-based TP of S$3.00 on better visibility of sustained profitability. Re-rating catalysts include: stronger revenue momentum for aviation industry driving better operating leverage and positive cashflow leading to a resumption of dividends. Downside risks: deteriorating cash generation, as well as a recession affecting aviation industry.
