Brokers’ take: Analysts mixed on Sats, caution weaker air cargo outlook

ANALYSTS were mixed on Sats after the company released its full-year results on Monday (May 29), where it announced a net loss of S$26.5 million for FY2023. 

CGS-CIMB downgraded its call on Sats to “hold” from “add” and lowered its target price to S$2.60 from S$3.10, while UOB Kay Hian (UOBKH) maintained its “buy” call with an unchanged target of S$3.02. 

Both research houses expect Sats to benefit from a general recovery of the aviation industry, but also see near term headwinds in the form of lower cargo revenue, a continued rise in staffing costs, and the early redemption of World Flight Services (WFS) bonds. 

On Wednesday, CGS-CIMB analysts said that front-loaded redemption costs from WFS’ medium-term notes are likely to “sink Sats back into net losses” in the first quarter of FY2024. 

“Nevertheless, we believe Sats will be able to offset the premium (from the medium-term notes) with finance cost savings of S$40.7 million per annum based on a refinancing rate of 4.5 per cent,” said its analysts. 

As a result of the expected near-term headwinds, CGS-CIMB now expects the aviation food solutions and gateway services provider to report a core profit down to S$86 million for FY2024 and S$193.1 million in FY2025, down 22.8 per cent and 17.5 per cent, respectively, from their earlier estimates. The research house however kept FY2026 core profit forecasts unchanged at S$248.4 million. (see *Amendment note)

Based on the revised target price, CGS-CIMB analysts noted that Sats is now trading at a “steep” valuation for FY2024 versus the historical average, although the stock’s valuations “look more palatable” based on their FY2025 estimates.  

While UOBKH said Sats’ FY2023 results represented a “slight miss” to the research house’s forecasts, it also said the counter’s recent share price drop has likely priced in downside risks. 

Despite cautioning of “subdued” earnings levels in FY2024, its analyst Roy Chen remains positive on the stock’s long-term earnings potential – particularly FY2025, where he said the market can “feel the true earnings potential of Sats with WFS”. 

SEE ALSO

Sats H2’s bottom line down 16.7% to S$6 million as higher expenses eat into profits

Chen also cut his FY2024 earnings estimates by 31.6 per cent to S$67 million to reflect the effects of weaker air cargo demand in the near-term. He remains cognisant that consensus forecasts remain “on the high side and are poised for further cuts”. 

However, the analyst raised his FY2025 earnings projections for Sats by 4.2 per cent to S$252 million and 2 per cent to S$286 million for FY2026. This is to factor in adjusted interest cost savings from WFS’ early redemption of its notes.  

As at the midday trading break, shares of Sats were down 2.3 per cent or S$0.06, at S$2.52. 

*Amendment note:  An earlier version of this story incorrectly said that CGS-CIMB’s projected core profit for Sats was S$111.4 million for FY2023 and S$234 million in FY2024. It is in fact S$86 million for FY2024 and S$193.1 million for FY2025. The article above has been revised to reflect this.