Brokers’ take: Analysts split on Sats’ recovery outlook after H1 results
Michelle Zhu
BROKERAGES have expressed opposing views on what Sats ’ H1 financial and operating metrics could mean for the group’s recovery ahead.
Citi upgraded its call on the stock to “buy” from “neutral”, while raising its price target to S$3.01 from S$2.98. CGS-CIMB also upgraded its “hold” rating to “add” with a higher target of S$3 compared with S$2.86 previously.
On the contrary, Phillip Securities downgraded its recommendation to “reduce” from “neutral” as the brokerage cut its target price to S$2.23 from S$2.51.
Their moves come after the ground-handling and inflight catering services provider last week reported a narrower net loss of S$7.8 million for the first half of the fiscal year, and a net profit of S$22.2 million for Q2.
Citi analyst Kaseedit Choonnawat said he was “increasingly confident of Sats’ sequential earnings recovery”, given how the group has started to deliver profits post its acquisition of Worldwide Flight Services (WFS).
This is coupled with the group’s positive operating leverage as its global air cargo volumes returned to the green on a year-on-year basis since August 2023.
Despite lowering its core earnings estimates over FY2023 to FY2024, the brokerage raised its projections for Sats over the following two financial years.
“Our 20 times price-to-earnings ratio valuation is in line with Sats’ pre-Covid range and 2024 average of major global air-freight forwarders compared to 17 times currently,” said Choonnawat in a report on Monday (Nov 13).
He added that FY2024/25 remains an “anchor year” for the group as he expects full normalisation of passenger traffic during this period.
Similarly, CGS-CIMB analysts said that Sats’ second-quarter performance pointed towards “better visibility of sustained profitability”.
The brokerage has raised its FY2024 earnings per share (EPS) estimates by 121.2 per cent while revising its FY2025 projections up by 49 per cent, and upwards by 22.4 per cent for FY2026.
Despite staff costs rising quarter on quarter, its analysts reckon that Sats has “reached an optimal level of staffing” given how the group’s Q2 staff count declined marginally from the previous quarter.
They also expect a recovery in the food solution segment to drive the group’s near-term growth ahead.
“We think the continued recovery in the aviation industry would drive meals served on flights for Sats, resulting in the segment’s earnings before interest and taxes margins reverting towards FY2018-2020’s average of 14.7 per cent by FY2025.”
Conversely, Phillip analyst Peggy Mak remarked that the “mix was disappointing” for Sats’ H1 financials as its food solutions segment remained in the red despite its recovery in revenue to pre-Covid levels.
“Further growth is limited given the manpower and capacity bottlenecks faced by airlines. Thus, we are concerned that further improvement in food solutions earnings could be muted,” said Mak.
Noting that the group’s Ebit “barely covered” its higher interest expenses on debt incurred for WFS’ acquisition, she also cautioned of higher working capital needs which could arise from the acquisition of WFS.
Mak nonetheless remained positive on the potential for the group to report improving operating leverage from higher cargo volumes, which could lift Sats’ overall operating margin from its current level of 3.1 per cent.
Shares of Sats were trading S$0.13 or 5.1 per cent higher at S$2.69 as at 9.52 am on Tuesday.
Decoding Asia newsletter: your guide to navigating Asia in a new global order. Sign up here to get Decoding Asia newsletter. Delivered to your inbox. Free.
Copyright SPH Media. All rights reserved.
