CGS-CIMB on Tuesday (Jan 16) raised its target price on Sats : S58 0% to S$3.44 from S$3 after lowering its assumptions for the inflight caterer and ground handler’s weighted average cost of capital (WACC).

The research team’s WACC assumption now stands at 9.9 per cent from 10.5 per cent previously, due mainly to a lower risk-free assumption of 2.5 per cent from 4 per cent previously.

CGS-CIMB took into account Singapore’s 10-year government bond yield of 2.8 per cent and expectations of interest rate cuts in the second half of 2024 in its calculations.

Its new target price of S$3.44 is 25 times CGS-CIMB’s predicted earnings for Sats in FY2026 ending March, which is one standard deviation above Sats’ 2013-2018 average. CGS-CIMB believes this valuation is justified, given the group’s improving earnings before interest and taxes (Ebit).

The new target implies a potential upside of 19.4 per cent from the counter’s last trading price of S$2.88 as at 4.15 pm. Shares of Sats were down 1.7 per cent or S$0.05 at the time.

For now, the research team has kept its earnings estimates for FY2024-26 unchanged. It expects Sats to report a 7 per cent quarter-on-quarter (qoq) growth in revenue of S$1.4 billion for Q3 2024 ending March, supported by cargo demand and higher international visitor arrivals.

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It foresees an Ebit growth of 22.7 per cent qoq to S$80.5 million for the same period, and a 70 per cent qoq growth in profit after tax and minority interests of S$28 million.

CGS-CIMB believes a strong December 2023 performance could be underway due to the peak travel season and gifting season. This could support revenue growth for Sats’ cargo business, which makes up nearly half of its revenue.

Furthermore, the Red Sea crisis could increase demand for air cargo in the near term as maritime trade routes face pressure from shipment delays.

“This could further drive up Sats’ cargo volumes heading into Q4 FY2023/24, on top of the broad-based recovery in air cargo demand,” CGS-CIMB noted. Such impact, however, is not expected to be long-lasting unless a prolonged crisis results in shipments not reaching their destinations.