Brokers’ take: DBS upgrades Sats to ‘buy’, lowers TP

DBS Group Research upgraded Sats to “buy” from “hold” despite slashing its target price to S$3.40 from S$4.30, due to a change in valuation method.  

The new target price was derived from an updated blended valuation framework, which, together with a discounted cash flow valuation, incorporated a forward enterprise value (EV)/Ebitda (earnings before interest, taxes, depreciation and amortisation) multiple instead of forward price-to-earnings.

Analyst Jason Sum on Friday (May 19) said this was a “more relevant metric” for ground and cargo-handling companies.  

While Sum said that Sats’ purchase of air cargo handler Worldwide Flight Services (WFS) was at a steep price tag and a less-than-ideal timing, he sees the group’s recent share price correction as “overdone” and “overly pessimistic” – thus presenting a buying opportunity. 

He views the acquisition as a “highly complementary and strategic fit for Sats”.

The combined group will also be in a good position to capitalise on growth opportunities in the air cargo market, with Boeing predicting that global air cargo traffic will more than double over the next two decades, he added. 

Contrary to the valuation multiple of 9.7 times at which Sats acquired WFS, Sum estimates that the true EV/adjusted Ebitda multiple of the transaction was 11.9 times. 

The new multiple comes after stripping out non-recurring items like payroll support programme grants from the Ebitda figure used by the group. Sum said that this is also above the average of 9.6 times for precedent transactions in the aviation sector.  

The analyst also noted that past transactions largely occurred in a low interest rate environment, and that the Sats-WFS deal was struck right before a downturn in the air cargo market – raising the question whether Sats could have secured a better deal by waiting.

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Although Sum said WFS is unlikely to be profitable in FY2023, he predicted that it should contribute meaningfully to Sats’ bottom line from FY2025 onwards. 

Despite a “deceleration” expected in the group’s cargo business, Sum also predicted that Sats’ ground handling and in-flight catering businesses would benefit from a recovery in global air passenger traffic. 

“Moreover, Sats’ non-travel related food business should also register healthy growth, underpinned by the group’s expanding product portfolio and customer base, and increased production capacity and footprint,” said the analyst. 

Sats will be releasing its financial results for the second half and financial year ended Mar 31, 2023, after market trading hours on May 29. 

As at 10.45 am on Monday, its shares were up S$0.06 or 2.2 per cent to S$2.76.