SATS - OCBC Investment 2022-11-11: PATMI Loss Narrowed In 2QFY23

SATS LTD. (SGX:S58)

SATS - PATMI Loss Narrowed In 2QFY23

SATS (SGX:S58)’s 2QFY23 revenue rose 46.0% y-o-y or 14.2% q-o-q to S$429.0m, boosted by stronger performances from both Food Solutions (+16.2% q-o-q) and Gateway Services (+12.3% q-o-q), on the back of a continued recovery in air travel.
Operating income was at a loss of S$8m as the growth in group expenditure (+48.9% y-o-y, or 6.6% q-o-q to S$437.0b) outweighing the growth in revenue. The increase in expenditure was largely due to lower government grants of S$9.8m in 2QFY23 vs S$36.9m in 2QFY22 and higher employment cost. 2QFY23 PATMI loss narrowed from -S$22.5m in 1QFY23 to -S$9.9m, above our initial expectation of -S$11.1m.
Excluding the impact of government relief, PATMI would have been at a loss of S$19.7m during the quarter, compared to a loss of S$31.9m in 1QFY23.

SATS’s operating statistics continued to improve in 2QFY23. On a q-o-q basis, SATS’s flights handled improved by 20.0% q-o-q while passengers handled grew 29.9% q-o-q.
Separately, meals served rose 28.7% q-o-q. For 1HFY23, SATS’s flights handled, meals served, and passenger handled recovered to 62%, 75% and 56% of pre-pandemic levels respectively.
On the other hand, cargo demand weakened in 2QFY23 with volume processed declining 2.6% q-o-q, mainly due to supply chain strain in China. Cargo volume was at 89% of pre-COVID levels in 1HFY23.

SATS is at an advanced stage of finalising its funding plan for the proposed acquisition of WFS, the largest global air cargo handler. The total cost of the proposed acquisition is estimated to be S$1.8b, to be financed by a combination of EFR of not exceeding S$800m, term loans (~S$700m) and internal cash (~S$320m). We estimate pro-forma net gearing to increase to ~0.9x.
Further details of the funding plan will be announced prior to the EGM which is expected to be convened in Jan 2023.

We expect SATS to break-even in 2HFY23. SATS is poised to benefit from the recovery in passenger traffic at Changi Airport which is on track to reach 80% of pre-COVID levels by end of 2022. We lower our estimates mainly due to higher professional fees and higher operating expenses. We also raise WACC assumptions due to higher risks. Correspondingly, our fair value estimate decreases from S$4.72 to S$3.26.
Pending more details from the proposed acquisition, our earnings estimates do not incorporate the contribution from WFS. The proposed acquisition is likely to benefit SATS over the long run given WFS’ status as a global leader in cargo with a complementary portfolio to SATS, in our view.
See
Investors with a long-term investment horizon may stay invested but a potential EFR remains an overhang, weighing on near-term share price performance.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2022-11-11

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