UOB Kay Hian analyst Roy Chen is maintaining his “buy'' call on SATS Ltd with an unchanged target price of $2.99, as he expects the group to show sequential earnings improvement in the next few quarters. That said, a full realisation of its earnings potential may only happen much later, says Chen in his Oct 16 report.
The analyst’s target price is still based on 9.7x of SATS’s FY2025 enterprise value (EV)/adjusted earnings before interest, taxes, depreciation and amortisation (ebitda). The 9.7x multiple applied is at 1.7 standard deviation (s.d.) below the group’s FY2014 to FY2019 mean EV/ebitda of 12.8x.
SATS’s current price of $2.59 implies an undemanding FY2025 EV/adjusted ebitda multiple of 8.9x, which is 2.1 s.d. below its historical mean, says Chen.
The analyst’s report comes after an investor meeting with SATS during the UOB Kay Hian Asian Gem Conference with 14 institutional investors on Oct 13, where updates on SATS’s integration with Worldwide Flight Services (WFS) and insights on the global air cargo sectors were shared.
One key point observed was SATS’s reiteration of its priority of accelerating synergy realisation between the group and WFS, as well as to return to profitability in order to be able to resume dividend payment to shareholders.
Slow and steady
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Since the completion of the acquisition of WFS in early April, SATS has become the leading handler of air cargo volume across major global airports. The integration of the group and WFS, which has been “progressing very well”, has been centred around enhancing productivity through operation excellence and effective cost management.
Furthermore, by leveraging on the enlarged network, SATS has also won new contracts in excess of $15 million per annum (p.a.), and the group is currently working closely with a major global freight forwarder customer to explore cross-border services to enhance speed, efficiency and realise the potential of multimodal logistics.
Although global air cargo demand has notably been lacklustre in the past 12 to 15 months, SATS is seeing positive signs that the contraction of cargo volume is reducing.
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Chen writes: “We note that management’s observation is in line with the IATA (International Air Transport Association) air cargo data.”
The analyst continues, observing that according to IATA, global air cargo volume, which is measured by cargo tonne-kilometres, or CTK, declined 6% y-o-y in 8M2023.
However, on a monthly basis, y-o-y contraction has been narrowing for the past few months and in August, y-o-y growth returned to a positive 1.5%, although absolute cargo volume was still 1.3% lower than pre-pandemic levels.
As the global economic outlook improves, SATS remains hopeful that cargo volume will continue to pick up.
Despite this, Chen understands that a number of leading economic indicators for global trade still indicate a largely cautious near-term outlook.
In September, the global manufacturing purchasing manager’s index (PMI) new export order sub-index of 47.7 was still in contractionary territory.
“The inventory destocking process in the US took longer than expected with retail and wholesale inventory to sales ratios still on the high side. EU retail confidence has been weak in recent months, with more retailers indicating they have sufficient inventory stocks on hand hence the less urgent need to place new orders with their suppliers,” writes the analyst.
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Consequently, although Chen expects air cargo demand to firm up in the seasonally strong October to November period, he thinks more meaningful air cargo recovery may only be seen in FY2025, and for SATS to only realise its full-earnings potential in FY2026.
Conversely, the profitability of SATS’s food division looks to continue to recover in the next few quarters, driven by the continued recovery of regional air traffic.
Pending forecast
Meanwhile, the group’s 2Q/1HFY2024 results, which are expected to be released on Nov 10, will include the non-cash impacts of SATS’ purchase price allocation and international financial reporting standards (IFRS) conversion for WFS in its 2QFY2024 results, following the completion of a preliminary review by the group’s auditors.
After factoring in a moderate q-o-q operating improvement of SATS and WFS in 2QFY2024, the analyst at UOB Kay Hian’s “best guesstimate” is for the group’s core earning to possibly break even in 2QFY2024, with a tolerance of more or less $10 million.
“This is compared to $17.4 million core net loss in 1QFY2024 and $6 million core net loss in 2QFY2023,” writes Chen.
With the gradually improving but still-lacklustre air cargo outlook to-date, the analyst notes that his FY2024 profit forecast of $90 million could be optimistic.
He adds: “We will do a holistic review pending more clarity from SATS’s 2Q/1HFY2024 results.”
Key re-rating catalysts noted by Chen include the sequential sequential earnings improvement as regional air traffic recovers further and global air cargo outlook improves, as well as the delivery of SATS’s forecasted synergies for the WFS consolidation.
As at 12.50pm, shares in SATS are trading at two cents higher or 0.78% up at $2.58 on Oct 17.
