Brokers' take: UOBKH raises SATS target price as airline market recovers

UOB Kay Hian (UOBKH) has reiterated its "hold" call on SATS but raised its target price to S$4.27 from S$4.07 previously, on expectations of border reopenings and a subsequent recovery in traffic.

In a Friday report, analyst K Ajith noted that SATS is trading at just 5 per cent below pre-Covid-19 levels at the share price of S$4.56. He believes this implies that the market is swiftly pricing in a recovery.

While the analyst has lowered his FY2022 earnings estimate by 27 per cent to factor in lower Jobs Support Scheme payouts, he has raised his FY2023 net profit estimate by 19 per cent to include slower wage growth and stronger associate earnings.

"Operationally, we sense there would be significant operating leverage as flights resume, but a key uncertainty is the impact on margins from changes in inflight catering," said Mr Ajith.

His expectations of high operating leverage are to be led by SATS' investments in digitalisation, while current margins at cargo handling operations are guided to be in the teens.

Aside from higher cargo volumes that have risen close to pre-pandemic levels, he also highlights that SATS has gained market share - and expects greater reliance on e-commerce shipments with a higher focus on air cargo for critical supply chain needs.

The analyst reckons any bolt-on acquisitions, which he believes SATS appears to be on the lookout for, would likely involve food factories in China or India. However, he remains neutral on the mergers and acquisitions angle at this juncture given his view of the group's "uneven track record".

"Pre Covid-19 in 2019, SATS traded at an average of 25 times 2019's earnings, with multiples being justified due to its monopolistic status at Changi Airport. However, we believe such multiples might no longer be justified post Covid-19, due to the cyclical nature and volatility of the aviation industry," said Mr Ajith.

"At our fair value, SATS would be trading at 20.2 times FY2023 earnings and 21 times pre Covid-19," he added.

Sats shares ended down at S$4.50, S$0.06 or 1.32 per cent lower on Friday.