Date of Report: 3 October 2024
Broker: UOB Kay Hian

Strong Earnings Momentum

SATS is experiencing significant earnings momentum following a substantial improvement in its first quarter of FY2025. The company is expected to maintain this strong performance in the next two quarters, driven by seasonal factors and contract renewals with its major customer, Singapore Airlines.

Impact of US Tax Changes

While the change in the US De Minimis tax rules, anticipated to be implemented next year, may adversely affect US air cargo volumes and SATS’ US air cargo handling businesses, the impact is expected to be felt later. Prior to the implementation, a surge in US cargo volume is likely as consumers bring forward their purchase orders.

Benefiting from Shipping Disruptions

SATS is poised to benefit from potential major disruptions in shipping due to the ongoing port strike on the US East Coast. Management reports that a prolonged strike could lead to global repercussions, possibly causing disruptions even more significant than those experienced during the pandemic lockdowns. If this occurs during the seasonally strong third quarter of FY2025, SATS could see positive impacts on its earnings, reflecting the company’s operational leverage.

Investment Recommendation and Target Price

UOB Kay Hian maintains a “BUY” rating for SATS, with a target price of S$4.00. This recommendation is based on a price-to-earnings (PE) ratio of 18.4x for FY2026, which is 0.5 standard deviations below SATS’ historical mean PE of 19.9x.

Key Catalysts for Growth

Key events that could drive SATS’ share price higher include:

• Continued strong earnings performance in the second and third quarters of FY2025.
• Increased air cargo volume due to the diversion of shipping traffic from ocean freight to air transport.
• Contract renewals and expansions with major clients that enhance operational capacity and profitability.