DBS Group Research analyst Jason Sum has downgraded his recommendation on SATS to “hold” from “buy” after the group saw red again in the 4QFY2022 ended March.
Sum has also lowered his target price to $4.50 from $4.90 previously as the food solutions and gateway services provider is likely to see operating costs grow faster than its revenue over the next few quarters.
On May 30, SATS reported a core net loss of $10.6 million, down from the $5.1 million in core net profit in the 3QFY2022 and core net profit of $13.2 million in the 4QFY2021.
SATS’s full-year core PATMI came up to $18.4 million, which missed the street’s projection of $34.4 million.
While Sum sees SATS’s revenue staging a “solid rebound” from the 1QFY2023 onwards with the reopening of international borders and Singapore’s new vaccinated travel framework (VTF), he also sees operating costs outstripping any gains.
The higher operating costs will be attributable to higher staff costs with restored manpower supply and higher food costs.
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“While SATS has multiple levers to control its raw material costs, we believe that the group may have difficulties passing on any increased costs to its consumers,” Sum writes in his June 1 report.
“Consequently, the management has guided that operating costs will likely outpace revenue growth over the next two quarters at least, before reversing this trend towards 4QFY2023,” he adds.
In addition to his lower target price, Sum is slashing his net profit estimates for the FY2023 and FY2024 by 53% and 10% respectively to reflect the cost headwinds.
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As a result, he is also lowering and rolling his P/E peg forward to 30x blended FY2023/FY2024 net profit from 35x previously.
He admits, however, that his earnings projections are lower than that of the street’s as he is more conservative on his operating cost assumptions.
“SATS has outperformed most other aviation plays this year, notching a year-to-date (y-t-d) gain of 12.6%, despite the retreat in its share price post its results, and we believe that the stock is now fairly priced at 22-24x FY2024 earnings,” the analyst notes.
“Furthermore, dividends will likely only be reinstated in FY2024, which is when we anticipate the company to convincingly return into the black,” he adds.
That said, Sum is still recommending investors accumulate on the counter’s dips. Investors may also consider looking into other reopening plays that are “better positioned” to deal with rising inflation like Singapore Airlines (SIA) and Singapore Technologies Engineering (ST Engineering).
UOB Kay Hian lowers target price
UOB Kay Hian analyst Roy Chen is keeping his “buy” recommendation on SATS, although he is lowering his target price on the counter to $4.75 from $4.85 previously.
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Like his counterpart at DBS, SATS’s results for the FY2022 stood below his expectations.
Chen has also cut his core net profit estimates for the FY2023 and FY2024 by a respective 54% and 15% amid cost pressures from labour and food ingredients, which will continue to weigh on SATS’s financial performance in the near-term.
His forecast for the FY2025 remains intact.
“[The move] reflects our updated expectation of keener cost pressure in the near term and hence a more backend-loaded earnings recovery. The increase in FY2023 to FY2025 revenue projection is due to the financial accounting consolidation of Asia Airfreight Terminal or AAT (now a 65.4% subsidiary vs previously a 49% associate),” the analyst writes in his June 1 report.
According to Chen’s estimates, SATS’ current trading price of $4.38 implies an FY2025 P/E of 18.3x, 0.5 standard deviation below its historical average.
In the analyst’s view, catalysts for SATS include faster-than-expected earnings recovery and relaxation of travel restrictions in key Northeast Asian markets including China and Japan.
Key risks for SATS include any event that disrupts the aviation sector recovery as well as failure to pass down cost pressures, he says.
Citi Research's recommendation and target price remains the same
Citi Research analyst Kaseedit Choonnawat has also kept “buy” on SATS with an unchanged target price of $4.60.
Even though SATS’s results were also a miss, according to Choonnawat’s estimates, the analyst still likes the counter due to its benefitting from the recovery of air traffic, its defensive balance sheet, as well as the eventual reopening of China.
CGS-CIMB and OCBC up target price
CGS-CIMB Research and OCBC Investment Research are the two houses that are the most positive on SATS.
In his report dated June 1, CGS-CIMB analyst Tay Wee Kuang has kept "add" on the counter with a higher target price of $4.88 from $4.77 previously.
The target price upgrade comes as the analyst sees SATS turning profitable in the FY2023 on the back of the anticipated recovery of the aviation sector.
However, the analyst has lowered his earnings estimates for the FY2023 and FY2024 by 21.3% and 11.1% respectively on the ongoing cost pressures, mainly due to the higher staff costs and inflationary pressures.
To him, the higher staff costs are necessary for SATS due to the lead time required for training. The pre-emptive increase in headcount comes after Changi Airport announced that its passenger traffic returned to around 40-50% of pre-pandemic levels as of May after Singapore drastically relaxed its border measures in April.
The analyst sees a swifter recovery of the aviation and the successful execution of its mergers and acquisitions (M&A) plans as re-rating catalysts, while subdued travel demand post initial deferred demand and inability to pass through costs are downside risks.
OCBC analyst Chu Peng has also kept "buy" on SATS with a higher target price of $4.94 from $4.77.
In her June 1 report, Chu has raised her target price estimate as she expects SATS to post revenue growth amid a normalised operating cost over time as capacity and scale ramp up.
"We revise our estimates on recovery trajectory and cost estimates, hence our fair value estimate increases from $4.77 to $4.94," she writes.
"We continue to see SATS as a beneficiary of global borders reopening, a gradual recovery of air travel, and strong cargo performance due to e-Commerce demand," she adds.
As at 1.45pm, shares in SATS are trading 8 cents lower or 1.83% down at $4.30, or an FY2023 P/B of 3x, according to DBS’s estimates.
