SATS Ltd: A Comprehensive Financial Analysis

Broker: UOB Kay Hian

Date of Report: Monday, 11 November 2024

Company Overview

SATS Ltd is a leading food solutions provider in Asia and a global leader in aviation gateway services. The company has shown impressive growth and has maintained a strong market position despite the challenges posed by the global economic environment.

Company Results

SATS Ltd has maintained its “BUY” rating with an increased target price of S\$4.30, indicating an upside potential of 11.7% from its current share price of S\$3.85. The company’s performance in the first half of FY25 has exceeded expectations, showcasing broad-based business volume growth across key segments and geographies.

1HFY25 Financial Performance

The company’s 2QFY25 headline net profit stood at S\$69.7 million, a 7.2% quarter-on-quarter increase, despite being negatively impacted by a significant forex loss. Excluding the forex loss, the core net profit rose 54.5% year-on-year to S\$91.3 million. The first half of FY25 saw a core net profit of S\$150.4 million, slightly above expectations and constituting 54.9% of the full-year forecast.

Revenue Growth

SATS Ltd achieved a 14.8% year-on-year increase in revenue, reaching S\$2,821 million in 1HFY25. The food solutions segment grew by 28.6%, while gateway services rose by 11.1%. This growth was driven by increased business volumes and steady or growing average prices.

Segmental Performance

The food solutions segment saw a 15.9% year-on-year increase in the number of meals produced, with aviation meals growing by 26.1% and non-aviation meals by 3.7%. The gateway services segment experienced a 17.5% rise in cargo volume and a 5.5% increase in the number of flights handled.

Key Financial Metrics

The company’s key financials for the years ending 31 March are as follows:

• Net Turnover: S\$1,758 million (2023), S\$5,150 million (2024), S\$5,715 million (2025F), S\$5,861 million (2026F), S\$6,045 million (2027F)
• EBITDA: S\$128 million (2023), S\$781 million (2024), S\$1,017 million (2025F), S\$1,055 million (2026F), S\$1,116 million (2027F)
• Net Profit (Adjusted): S\$79 million (2024), S\$277 million (2025F), S\$298 million (2026F), S\$351 million (2027F)
• EPS (S\$ cent): 5.3 (2024), 18.6 (2025F), 19.9 (2026F), 23.4 (2027F)

Stock Impact and Future Outlook

SATS Ltd expects a strong performance in 3QFY25, with earnings projected to be in the range of S\$90 million to S\$100 million, significantly higher than 3QFY24’s S\$31.5 million. However, 4QFY25 is anticipated to be the seasonally weakest quarter due to the Chinese New Year season and potential uncertainties if US tariffs are significantly raised.

Long-Term Growth Potential

SATS Ltd has set ambitious growth targets for FY29, aiming for over S\$8 billion in revenue, over 10% EBIT margins, and over 15% ROE. The company plans to leverage its superior service quality, best-in-class capabilities, unrivalled global network, strategic market channels, and long-standing clientele to achieve these targets.

Segmental Growth Targets

• Gateway Services: Target revenue of S\$6 billion by FY29, with an EBIT margin of 10%. This includes organic growth and additional growth from new cargo/ground handling stations or possible acquisitions.
• Food Solutions: Target revenue of S\$2 billion by FY29, with an EBIT margin of 13%. The company aims to capture the growth opportunity in the aviation fresh-frozen meal market in Asia and cater to the demand of non-aviation retail and F&B chains through strategic partnerships.

Risks and Valuation

While SATS Ltd has a promising long-term growth potential, there are uncertainties in FY26 related to potential US tariff hikes. The US air cargo handling contributed to about 30% of SATS’ total revenue in 1HFY25, and significant tariff hikes could create short-term pressure.

Earnings Revision

The FY25 core earnings estimate has been raised by 2% to S\$277 million, while the FY26 and FY27 estimates have been cut by 8% and 3% to S\$298 million and S\$351 million, respectively, to reflect potential uncertainties from US tariff hikes.

Valuation and Recommendation

SATS Ltd is maintained at a “BUY” rating with a higher target price of S\$4.30. The valuation is based on 18.4x FY27 PE, 0.5SD below SATS’ historical mean PE of 19.9x before the pandemic. The company’s proactive share buybacks in the market support a limited downside from the current share price.

Conclusion

SATS Ltd has demonstrated strong financial performance in 1HFY25, with broad-based business volume growth and ambitious long-term growth targets. Despite potential uncertainties in FY26, the company’s strategic initiatives and market position provide a solid foundation for future growth. Investors are recommended to stay invested in SATS for its long-term growth potential and expected strong performance in the upcoming quarters.