Brokers’ take: DBS downgrades SATS to ‘hold’ amid rising cost pressure

DBS Group Research has downgraded its call on SATS to “hold” from “buy” amid lower-than-expected Q4 results and rising cost pressures on operating margins.

Analyst Jason Sum also lowered its target price on the counter to S$4.50 from S$4.90, which is pegged at 30 times DBS’s estimates for FY2023 or FY2024 earnings.

The target price implies a potential upside of 4.7 per cent from Wednesday’s trading price of S$4.30 as at 2.28 pm. The counter was down S$0.08 or 1.8 per cent at the time.

In a research report on Wednesday (Jun 1), Sum recommended investors buy the dips instead, or rotate into other reopening plays that are better positioned to respond to rising inflation, such as Singapore Airlines and ST Engineering.

The food solutions and gateway services provider on May 30 reported earnings of S$7.2 million for its second half of FY2021-22 ended March, swinging into the black from a net loss of S$2 million in the year-ago period.

However, the group recorded an operating loss of S$46.6 million in H2 due to higher costs and lower government grants. Excluding government grants, group profit after tax and minority interests would be a loss of S$46.6 million.

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SATS back from the red with H2 earnings of S$7.2 million

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Noting that the results had missed expectations, Sum believes that SATS’ operating costs will rise faster than revenue in the next 2 quarters due to increased staff costs, an absence of government grants and higher food costs, despite having several levers to control raw material costs.

To account for cost headwinds, the analyst reduced SATS’ net profit estimates by 53 per cent in FY2023 and 10 per cent in FY2024.

It expects SATS to be back in the black in FY2024, when dividends are more likely to be reinstated. The group did not issue a final dividend for FY2021-22 as its board said it “would not be prudent” to pay a final dividend as SATS incurred a full-year loss excluding government reliefs.