UOB Kay Hian analyst Roy Chen is maintaining his “buy'' call on Singapore Airport Terminal Services (SATS) with an unchanged target price of $3.22, as he expects the group’s earnings recovery to gain traction for the FY2024 ended March 31, driven by the continued recovery in air traffic and growth in global air cargo demand.
Chen’s target price is based on 16.8 times SATS’s FY2026 price-to-earnings ratio (P/E), and is 1 standard deviation (s.d.) below SATS’s historical mean P/E of 19.9x.
He writes: “The 1 s.d. reduction P/E peg takes into account the likely higher margin of error for our FY2026 (normalised year) earnings forecast.”
In his Jan 10 report, the analyst notes that compared to other Singapore aviation players, SATS has been a “laggard” in terms of earnings recovery.
Tailwinds
However, Chen expects the group’s recovery momentum to gain speed in FY2024, as visa-free agreements between China with Singapore, Malaysia and Thailand look to usher the return of Chinese tourists to the region, in turn spurring regional air traffic and correspondingly, SATS’s inflight catering and flight handling businesses.
“In addition, with an already more or less stabilised headcount ramp-up, operating leverage should also kick in and help SATS’ earnings recovery. We forecast SATS’s FY2025 net profit at $158 million, a 283% y-o-y growth from FY2024’s low base of $41 million, and project SATS’s earnings to rise further to $285 million in FY2026,” notes Chen.
Due to the pausing of shipments through the Red Sea and forced re-routing via the Cape of Good Hope following attacks from rebels in the area, the analyst also views the Red Sea crisis as a potential catalyst for air cargo.
This should benefit SATS and provide “support” to the group’s cargo performance in the seasonally quieter 4QFY2024.
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He explains: “About 12% of global trade and 30% of global container traffic pass through the Red Sea. The rerouting adds 3,000 to 3,500 nautical miles and at least 10 days of transit time to the journey.”
“Given SATS’s large air cargo handling business presence in Europe via Worldwide Flight Services (WFS), we reckon that SATS is likely a beneficiary from the increasing demand for air cargo,” continues Chen.
With favourable tailwinds, the analyst forecasts SATS’s 3QFY2024 net profit at $25 million to $35 million, a “meaningful” q-o-q improvement from 2QFY2024’s headline net profit of $22.1 million or 3QFY2023’s “thin” profit of $0.5 million.
Chen writes: “We expect q-o-q earnings improvement to be partly driven by better business volume, which is helped by the strong seasonality, due to the year-end holiday travels.”
Cargo flow
The healthy expectations for SATS’s 3QFY2024 earnings have also come about via the International Air Transport Association (IATA) forecasting a 4.5% y-o-y growth for global air cargo demand in FY2024.
According to data from the IATA, after 19 consecutive months of y-o-y declines, global air cargo demand finally returned to positive territory in August 2023 with a y-o-y growth of 1.5%, followed by a consecutive 1.9% growth in September and 3.8% growth in October.
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Although numbers for November and December 2023 have not been published yet, logistics data vendor, Xeneta, point to y-o-y global air cargo demand growth rates of 5% y-o-y for the former and 9% for the latter.
Notably, SATS has a presence in Hong Kong International Airport (HKIA) via its 65.4% subsidiary, Asia Airfreight Terminal (AAT), which handles about 20% to 30% of HKIA’s cargo throughput.
Chen expands: “HKIA’s air cargo volume rose 10.0%, 12.1% and 17.8% y-o-y in September, October and November 2023 respectively.”
In FY2023, prior to the consolidation of Worldwide Flight Services (WFS), AAT contributed $119.2 million revenue to SATS, which the analyst characterises as “one of the worst-performing” compared to the normal estimated revenue of $150 million.
Despite this, AAT’s contribution formed around 37% of SATS’s cargo.
Key risks noted by Chen include a slower-than-projected earnings recovery trajectory and continued integration risks between SATS and WFS.
As at 4.50 pm, shares in SATS are trading at seven cents higher or 2.47% up at $2.90 on Jan 10.
