The analysts at OCBC Investment Research (OIR) and CGS International (CGSI) have both kept their “add” calls on Sats Group, with OIR’s Ada Lim lowering her fair value (FV) to $4.11 from $4.38 previously, while CGSI’s Tay Wee Kuang and Lim Siew Khee have lowered their target price (TP) to $4.35 from $4.40 previously.
DBS Group Research’s (DBS) Jason Sum has similarly kept his “buy” call at a lowered TP of $4.00 from $4.40 previously.
OIR’s Lim notes that with the removal of the “de minimis” exemption by the Trump administration, though challenging to quantify, will likely impact Sats’ volumes between China and the US.
As a result, Lim has reduced her target FY2025 enterprise value (EV) and earnings before interests, taxes depreciation and amortisation (ebitda) multiple from 8.4 times to 8.0 times to reflect the overhang of tariffs.
She writes in her Feb 24 report: “Sats confirmed that there will be an impact on its business from tariffs announced to date, though management is not expecting this to be significant. Volumes from Canada and Mexico are minimal, while those from China are more sizable.”
In the 3QFY2025, the group’s revenue grew 12.5% y-o-y to $1.5 billion on higher business volumes, rate increases, and a seasonal year-end peak. Revenue from its gateway services business increased 10.1% y-o-y to $1.2 billion, as air cargo volumes grew 6.8% q-o-q to 2.4 million tonnes, supported by e-commerce demand and a shift from ocean to air freight due to disruptions in the Red Sea.
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Flights handled improved a further 0.3% q-o-q to 161,000. Meanwhile, revenue from Sats’ food solutions jumped 21.2% y-o-y to $356.7 million, driven by a 20.7% y-o-y increase in aviation meal volumes to 16.3 million.
On the other hand, non-aviation meals served during the quarter fell 14.3% and 5.8% lower q-o-q and y-o-y, respectively to 9.8 million, as a result of the termination of some operations in Kunshan and tapering of food provision for the Singapore Army’s Exercise Wallaby in 2QFY2025.
Operating expenses in the quarter grew at a slower 10.3% y-o-y to $1.3 billion, although Lim notes that this includes an unrealised foreign exchange (forex) gain of $5.1 million.
With this, Sats’ ebitda and operating profit for the quarter grew by 24.2% and 52.6% y-o-y to $263.9 million and $127.3 million, respectively. Together with a 20.2% y-o-y decline in associates and joint ventures (SoAJV) to $27.6 million, Sats reported a profit after tax and minority interests (patmi) of $70.4 million for the quarter, more than double of the $31.5 million recorded in 3QFY2024.
For the 9MFY2025, revenue and patmi constituted 74% and 71.2% of Lim’s initial full year forecasts, respectively.
“We deem this to be slightly below our expectations due to a 7% q-o-q decline in 3QFY2025 SoAJV, on the back of an adjustment of purchase price allocation which provided a boost to 3QFY2024 figures.”
Sats’ management has shared that the group has already secured a $92 million out of the targeted $100 million of ebitda synergies from the integration of Worldwide Flight Services (WFS), on top of financial and fiscal savings of $53 million per annum.
“It is open to reviewing this target and may potentially announce a more ambitious figure in coming quarters,” writes Lim.
The analyst concludes: “Until there is more clarity around the evolving situation, we expect Sats’ share price performance to remain fairly muted in the near-term.”
Potential catalysts noted by her include stronger-than-expected cash flow generation ability either due to stronger revenue momentum or effective cost structure optimisation, growth in Sats’ associates and joint ventures’ (JV) earnings and finally, the resumption of dividends.
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Conversely, investment risks include macroeconomic concerns and a recessionary outlook, sticky inflation placing pressure on margins and reducing profitability and lastly, execution hiccups.
Meanwhile, CGSI’s Tay and Lim note that Sats’ management shared that there was an accrual of 9MFY2025 staff bonuses in 3QFY2025, without which, 3QFY2025 earnings before interests and taxes (ebit) margins would have been 19.2%.
They write: “We estimate an operating expense (opex) impact of around $12.8 million from the bonus accrual, suggesting ebitda would still have declined by around 0.1 percentage points (ppts) q-o-q.”
“We deem 9MFY2025 net profit of $205.1 million in line at 79.9% and 80.9% of our and Bloomberg consensus’ FY2025 estimates, as we expect 4QFY2025 to be weaker due to a weak quarter for cargo seasonally,” add Tay and Lim.
The analysts’ ‘add’ call is based on Sats’ improved utilisation of its new central kitchens in China, India and Thailand, which they note should continue to support double-digit earnings growth over the next two years.
Re-rating catalysts noted by the analysts include accelerated debt repayment from stronger cash flow generation leading to more finance cost savings, diffusion of trade tension supporting continued growth of global cargo demand.
On the other hand, while DBS’s Sum is similarly cautious of Sats’ near-term outlook from post-tariff effects, he sees rising air passenger traffic and the group’s fresh-frozen meal strategy to underpin solid growth in its aviation food and ground handling businesses.
“As a result, we now expect modest core earnings per share (EPS) growth of 8% y-o-y in FY2026, with a rebound likely in FY2027.”
He adds: “We believe the group is well-positioned to leverage its extensive network to secure more commercial wins and expand market share. Additionally, Sats stands to further lower its cost of debt by 50 to 100 basis points (bps) following upcoming debt repayments and refinancing this year.”
Shares in Sats closed 11 cents lower or 3.33% down at $3.19 om Feb 24.
