Analysts are mixed on SATS's prospects, with most of them lowering their target prices after the company's FY2023 and 4QFY2023 results ended March 31.
CGS-CIMB Research analysts have maintained their "add" call but lowered their target price to $2.60 from $3.10 previously.
SATS reported a core net profit of $7.2 million, which was short of consensus estimates of $10.1 million but ahead of CGS-CIMB’s $2.5 million forecast.
The company chose to refrain from paying dividends for now as it would still be in the red if not for government grants.
While SATS enjoyed higher numbers from the resumption of travel, the company got to bear higher operating costs too.
Staff costs, for example, was up 9.1% q-o-q, despite the recognition of $19.7 million in government grants. Raw materials, meanwhile, increased too, up 3.4% q-o-q during the quarter.
SATS, which recently completed the acquisition of Worldwide Flight Services, warns of growing uncertainty in macroeconomic conditions, which could further hurt both consumer and business spending.
Analysts Tay Wee Kuang and Lim Siew Khee believe that SATS will continue to suffer from an overhang, as the company bears near-term integration costs, determination of goodwill and intangible assets, as well as an outsized lease liability which will affect the headline earnings number.
“We expect pressure on the share price as the market awaits more clarity,” note the analysts.
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In addition to their lower target price, Tay and Lim have also lowered their core net profit estimates for FY2024 and FY2025 by 22.9% and 17.5% respectively after the company's briefing for analysts as costs are likely to stay high.
DBS Group Research analyst Jason Sum, on the other hand, acknowledges the challenges the cargo business might face because of a slower economy.
"Although a deceleration in SATS’ cargo business is on the horizon, we foresee the group’s ground handling and in-flight catering businesses benefitting from the global recovery in air travel. 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," he writes.
"The acquisition of WFS should also start yielding operational and financial synergies over the next few years," he adds, projecting SATS' earnings per share (EPS) to reach 19.2 cents per share in FY2025, or at 86% of its FY2019 levels.
Sum has kept his "buy" call on the stock with a lowered target price of $3.20 from $3.40 previously, as he cuts his FY2024 net profit estimate by 40% to reflect higher staff costs.
To him, SATS' FY2023 results came in "slightly better" than expected although he notes that cost pressures may linger.
"Near-term earnings outlook is uninspiring but longer term earnings trajectory is still promising," he says.
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Citi Research, which has a “neutral” call on the stock, flags uncertainty of over the pressure from debt refinancing incurred with the acquisition of WFS.
On the other hand, air traffic is expected to fully normalise in the coming FY2025 ending March 2024. Citi’s target price of $2.98 is pegged at 20x FY2025 earnings.
UOB Kay Hian analyst Roy Chen has kept his "buy" call and target price of $3.02 on SATS although the company's profit recovery missed his expectations.
That said, with SATS' share price down by 9.5% in the three days to Chen's report on June 1, the analyst believes the company's downside risks have already been priced in.
Like DBS's Sum, Chen has cut his FY2024 earnings forecast by 31.6% to $67 million to reflect the effects of weaker demand for air cargo in the near-term and adjusted interest cost saving projection from the WFS debt refinancing.
Even then, Chen notes that his forecast for FY2024 is "on the high side" and that is he poised to cut his estimates further if need be.
"Key risks include a prolonged sluggish global trade outlook, integration risks between SATS and WFS, and possible drags from start-up costs of SATS’ new central kitchen investments in the gestation period," he writes.
Meanwhile, Chen has upped his FY2025/FY2026 forecasts by 4.2% and 2.0% to $252 million and $286 million respectively with FY2024 being a "year of consolidation" and FY2025 being the year where the market can "feel the true earnings potential" of SATS with WFS.
"While we expect SATS to see some earnings improvement in FY2024, we reckon that its FY2024 earnings would be still at a very subdued level vs its long-term earnings potential, due to: SATS’ passenger-related businesses still on the recovery track in FY2024, weak cargo outlook for both SATS and WFS, benefits of debt refinancing having not kicked in, and possibly some unfavourable accounting items from the WFS consolidation," he says.
The OCBC Investment Research team has kept its "buy" call with a lowered fair value estimate of $3.15, down from $3.38 previously.
Like the rest of its peers, the team notes that SATS' successful integration with WFS will be key.
