Hopeful of improving profitability profile
- We think that SATS should see qoq revenue growth of c.7% in 3QFY3/24F to c.S$1.37bn, driven by a recovery in cargo demand and higher IVAs.
- As such, we expect SATS to report a c.S$28m in PATMI (+70% qoq) in 3QFY3/24F, with higher qoq revenue driving better operating leverage.
- We reiterate our Add call and lift our DCF-based TP (WACC: 9.9%) to S$3.44 from S$3.00 after lowering our WACC due to lower risk-free rate assumption.
Recovery of global cargo volumes accelerated in Nov 23
According to the International Air Transport Association (IATA), global air cargo demand improved 8.3% yoy to reach 22.4bn cargo tonne-kilometers (CTKs) in Nov 23 (Fig 1). This is the largest yoy increase since global air cargo demand returned to growth in Aug 23 following 17 months of yoy declines since Feb 22, even if current demand is 2.5% below the Nov 19 (pre-pandemic) level. We believe a similar growth rate is likely for Dec 23 given the gifting season, which should support revenue growth for SATS’s cargo business that made up c.49% of SATS’s revenue as of 1H24.
Global passenger demand almost back to pre-Covid levels
On top of the potential turnaround in cargo business, global passenger air travel demand reached 99% of the Nov 19 level in Nov 23 (Fig 2). Changi Airport saw 10.3m passenger movements in Oct-Nov 23 (67% of 3QCY23), and we expect a strong Dec 23 due to the peak travel season, to see 4QCY23F passenger movements surpass 3QCY23’s. As such, SATS’s ground handling and aviation food sub-segments should see revenue growth in 3Q23F on stronger seasonal travel. The latter is also likely to translate to higher qoq contributions from its associates and joint ventures in China, Japan, and Malaysia.
Operating leverage driven by expected stable cost profile.
While there are likely to be some cost step-ups, especially with SATS preparing for the opening of its central kitchen operations in Bangalore, Tianjin, and Bangkok, we do not expect a drastic cost escalation, especially with manpower-intensive ground handling and cargo business likely to have been well-staffed by 1HFY3/24, ahead of the peak travel season. As such, we expect EBIT growth of 22.7% qoq to c.S$80.5m in 3QFY3/24F.
Reiterate Add with a higher TP of S$3.44
We keep our estimates for FY24F-26F unchanged but lift our TP to S$3.44 due to lower WACC assumption of 9.9%, from 10.5% previously. We recognise that the low profit base could see volatility in earnings in the near term. The WACC reduction is due to a lower risk-free rate assumption of 2.5%, from 4.0%, given current SG 10-year government bond yield of 2.8% and rate cut expectations in 2HCY24F. Our TP implies FY3/26F P/E of 25x, 1 s.d. above its 2013-18 average, which we think is justified given its improving EBIT. Rerating catalyst is improving cashflow generation that supports resumption of dividends and paring down of debt. Downside risks: unexpected cost escalation, and impairment on WFS upon finalisation of its purchase price allocation (PPA) exercise by end-FY3/24F.
