Onto the next stage of growth
- 2QFY24 results in line, with significant improvement in operating margin
- Earnings momentum to accelerate from hereon on continued volume and margin recovery
- Trim FY24/25F adjusted EBITDA to factor in accounting impact from ongoing PPA adjustment
- Maintain BUY with slightly higher TP of S$3.40
1HFY24 results in line, with encouraging signs of recovery in the cargo handling segment
2QFY24 results in line with expectations, with turnaround in cargo segment driving growth. SATS reported group (SATS + WFS) 2QFY24 EBITDA of S$194.4m (+23% q-o-q, +460 % y-o-y), with 1HFY24 EBITDA of S$352.6m, accounting for c.45% of the street’s full-year estimate. The group is tracking well against estimates, as we anticipate continued recovery throughout FY24F, especially with the peak cargo and travel (for SATS) season approaching in 2HFY24. Encouragingly, the group’s bottom line also turned profitable, with it reporting a PATMI of S$22.2m in 2QFY24, a marked S$29.9m improvement from the previous quarter, with WFS returning into the black with a minor net profit of S$3.3m.
Group revenue of S$2,480.6m (+7.0% q-o-q, +198.8% y-o-y) in 1HFY24 was also aligned with our expectations, representing 48.8% of our full-year estimate. SATS’s individual flight and passenger volumes remained stable at 82% and 81% of pre-pandemic levels, respectively, demonstrating consistent performance. Meal services maintained at 97% overall, with a slight improvement in aviation food to 83%. Despite a sluggish air cargo market, the group (SATS + WFS) achieved a 5.8% q-o-q increase in cargo tonnage, compensating for lower volumes from existing customers by securing new contracts and expanding market share across various stations.
Operating margins strengthened significantly on increased economies of scale and turnaround in cargo segment. Individually, SATS and WFS experienced substantial sequential EBIT (including share of associates and JVs) growth of 100% and 277%, respectively, in 2QFY24, propelled by a significant upswing in ground handling, which saw operating margins rise to 8.0% from 1.1% in the prior quarter. SATS’s food solutions also recorded a positive operating profit for the first time since the pandemic, with the absence of government subsidies.
Accounting-related matters:
- Depreciation & amortisation adjustments: SATS saw a q-o-q decrease of S$19.1m in its D&A expenses, primarily due to ongoing adjustments from the WFS acquisition. Of this amount, S$8-9m was reclassified to be reflected under the share of profits from associates & JVs. Management anticipates providing a more accurate D&A run-rate starting next quarter.
- Elevated effective tax rate: SATS experienced an unusually high effective tax rate in the first half of FY24. The tax expenses exceeded profit before tax, largely due to non-tax deductible expenditures that arose from the purchase price allocation for WFS.
- Foreign exchange gains: The group recorded FX gains of S$10.3m in 1HFY24, mainly from translation gains on WFS’s debt in foreign currencies.
Integration of WFS is advancing smoothly. Management shared that commercial and network alignment between SATS and WFS has enabled the group to effectively engage with key customers to cross-sell services across regions. This collaboration has enhanced SATS’s service offering, ensuring greater control, visibility, and efficiency throughout its global network. The group managed to secure new commercial wins across various regions, including cold chain cargo handling for Etihad Airways in the US and Copenhagen and a long-term cargo handling contract in Belgium. Additionally, the group is continuing to invest in preparing for the long term and is currently expanding capacity at key cargo stations in Chicago and Madrid.
Earnings growth to accelerate from hereon; FY24/25F EBITDA estimates revised down slightly to reflect accounting impact. We have slightly reduced our FY24/25F EBITDA projections, by 2%/4%, to reflect the abovementioned accounting adjustments. Our outlook on the group’s earnings remains upbeat. Early indications of a stabilising global air cargo market and a robust recovery in global air traffic, particularly in Asia, are expected to bolster the group’s ground handling and aviation food service segments. Moreover, we anticipate a continued expansion of its operating margin, supported by the positive effects of increased operational leverage from rising volumes and further cost efficiencies realised from WFS in the medium term. Our current forecasts suggest that the group’s core EPS will recover to 70% and 94% of FY19’s level by FY25F and FY26F, respectively, a significant increase from 20% in FY24F.
Maintain BUY with slightly higher TP as we roll forward our valuation. We lift our TP to S$3.40 (vs. S$3.20 previously), as we roll forward our valuation peg to 8.5x blended FY24/25F EBITDA. We continue to be optimistic on the stock, given its improving earnings momentum from hereon and undemanding valuation. Furthermore, a potential reinstatement of dividends in FY25F could catalyse a re-rating, in our view.
