Citi Research analyst Kaseedit Choonnawat has resumed coverage on SATS S58 after an “internal restriction” since October 2022.
This time, the analyst re-initiated a “neutral” call on the aviation counter as he sees its risks and rewards being “in balance” as he sees four downside risks versus the three upside risks that were identified
The analyst has also given SATS a target price of $2.98 in his report dated March 30. The target price is based on SATS’ FY2025 (or calendar year 2024) average of 20x.
To Choonnawat, SATS has limited valuation upside even after its share price declined some 29% since it announced its potential acquisition of Worldwide Flight Services (WFS) on Sept 28, 2022. At its current share price levels, SATS is trading around 43% below its pre-Covid level.
“SATS’ recent rights issue will see a total number of shares increase by [around] 32% where [the] stock went ex-rights on March 1,” says Choonnawat.
“At our 11% below consensus earnings for FY2025 (5% above for FY2024), SATS is trading on 18.5x FY2025 P/E, which is close [to] its pre-Covid range and global freight forwarders’ calendar year (CY) 2024 average of [around] 20x,” he adds.
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However, he also sees the group as having a “strong positioning” on the global airfreight handling area. Together with WFS, SATS will become the world’s largest airfreight handler with around 40% of the global volume share, according to Choonnawat’s estimates. The combined group will have a presence at major airports across North America, Europe, the Middle East and Africa (EMEA) and Asia.
“We see the most visible synergies from cross-selling customers given limited geographical overlap, where SATS guides for a mid-term synergy of $100 million at ebitda level. We expect the improvement of [the] second derivative on global airfreight volume from 2H2023 and sequential improvements of Changi Airport traffic as positive tailwinds. Airfreight should contribute [around] 43% of normalised revenue post consolidation of WFS compared to [around] 12% pre-Covid,” he writes.
Downside risks, in Choonnawat’s view, include the ongoing consumption shifts to services that may potentially last into 2024. The pressure of labour costs, the delays or inability to refinance WFS’s debt into lower rates by CY2024, as well as the global recession that may drag airfreight and passenger volumes, are also downside risks.
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Upside risks, on the other hand, include faster-than-expected realization of $100 million synergy to ebitda, the control of costs, as well as stronger-than-expected pricing power and volume growth.
In his previous report dated Sept 29, 2022, a day after SATS announced its proposed acquisition of WFS for $1.64 billion, Choonnawat had rated SATS “buy” with a target price of $3.87.
