SATS: 4QFY24 results above expectations with resumption of dividends; ambitious long-term growth aspirations
- 4QFY24 results above expectations; full-year net profit surpassed the street’s expectation by c.14%
- Resumption of dividends was a positive surprise, signalling management’s optimism on the group’s prospects
- Deleveraging remains a top priority, and medium-term revenue and ROE targets are ambitious yet achievable with disciplined execution and strategic focus
- Maintain BUY with slightly higher TP of SGD3.60
Related Stories
- SATS Ltd: 4QFY24 results above expectations with surprise reinstatement of dividends29 May 2024
- SATS Ltd: 3QFY24 results in-line; FY25/26F earnings estimates largely unchanged despite positive developments due to margin pressures01 Mar 2024
- SATS: 1HFY24 results in line, with encouraging signs of recovery in the cargo handling segment15 Nov 2023
4QFY24 was a solid beat across the board; the dividend reinstatement was a surprise. SATS reported 4QFY24 net profit of SGD32.7mn, marking a 3.8% q/q improvement despite 4QFY24 being a seasonally slower period. FY24 full-year net profit amounted to SGD56.4mn, beating the street’s expectation by approximately 14%, largely driven by stronger-than-anticipated operating margins from economies of scale and contributions from associates/JVs. Core net profit, excluding WFS integration costs and one-off impairments on some legacy businesses, was SGD47.3mn in 4QFY24, representing an impressive 48.7% increase on a sequential basis. SATS’s performance would have been even better if not for some FX losses during the period (SGD18.7mn in 2HFY24).
Free cash flow after lease repayment soared to SGD119.0mn in 4QFY24, driven by a turnaround in SATS’s earnings and positive working capital inflow, marking a dramatic improvement from previous quarters (9MFY24: -SGD167mn), alleviating concerns on the group’s ability to generate free cash flow. Having finally returned to profitability without government reliefs, SATS declared a final dividend per share of 1.5Scts representing a payout ratio of c.40%, signalling management’s confidence in sustained business improvement.
Business momentum continues to be robust amid travel recovery and a rebound in global cargo volumes. 4QFY24 revenue came in at SGD1.34bn, registering a modest 1.2% q/q decline, which is in line with seasonality, while full-year revenue of SGD5.15bn beat our estimate by 1.7%. Encouragingly, SATS heritage (SATS standalone ground handling + cargo) revenue rose by 4.2% q/q as the segment handled higher cargo and flight volumes on a sequential basis. On a y/y basis, flights and cargo handled by SATS heritage and WFS rose by 14.2% and 6.4% and 28.8% and 16.3% respectively in 4QFY24. Meanwhile, the number of aviation and non-aviation meals produced surged by 41.5% y/y and 12.0% y/y respectively. Management highlighted that their yield management efforts are starting to pay off, noting a significant traction in the eCommerce segment, and also shared that the sea-to-air freight diversions have become more pronounced as the Red Sea situation is prolonged.
Group operating margin widened despite a sequential dip in top line. Group operating margin increased to 6.6% in 4QFY24, up from 6.2% in the previous quarter, as an improvement in the food solutions segment’s EBIT margin (7.3% in 4QFY24 vs 2.3% in 3QFY24) more than offset margin deterioration from SATS heritage and WFS. The strong turnaround in the food solutions margin was primarily driven by an increase in productivity amid adequate volumes, cost-cutting initiatives bearing fruit, and recovery among various units that were previously lagging.
SATS Strategy Update Key Highlights:
Near-term EBIT margin target of 10%: Management indicated that they aim to achieve an operating margin of 10% in the near future, particularly as they continue to execute their strategy to enhance cargo yields, enjoy greater efficiency as volumes climb, and implement more cost-cutting initiatives.
Abnormally high tax rate should be transitory: SATS’s effective tax rate was skewed in FY24, largely due to non-tax-deductible expenses, limitations on recognizing deferred tax assets among certain entities where accumulated losses have surpassed the limit, and a higher/lower incidence of profits in high/low tax regimes. SATS is actively working to restructure the group to ensure more effective tax shields going forward.
Better pricing at the home base of Changi Airport: SATS recently concluded its contract renewal with SIA. While management did not disclose the extent of rate hikes they were able to secure with SIA, we believe that the group should have been able to negotiate better pricing given the inflationary pressures over the past few years. The new rates with SIA will apply retrospectively from 1st April 2024. Additionally, after a 2.5-month delay, SATS will also impose a new cargo terminal collection fee of SGD0.04 per kg on direct imports at Changi Airport, effective 1st August 2024.
Frozen meal solutions could significantly broaden their customer base: SATS shared that advancements in frozen meal technology will enable them to effectively serve customers without the need for on-site commercial kitchens. The group has continuously worked on innovation in this category and succeeded in extending the shelf-life of its frozen food to 45 days without compromising on taste (blind taste tests suggest limited discernible differences between freshly cooked and frozen meals). Consequently, SATS can readily export frozen meals to airlines based in countries where it does not have kitchen facilities. SATS can offer a competitive price on its frozen meals because of cost savings from operating at food facilities outside airports. Additionally, frozen meals will also allow airlines to reduce food waste and reap some cost savings from preventing wastage.
Approximately SGD40mn of synergies realised from the integration of WFS: This includes SGD28mn of earnings from new commercial wins jointly clinched by SATS and WFS, and SGD12mn of cost savings from bulk procurement. The group remains optimistic about gaining more market share and expanding their wallet share among existing customers, particularly as they continue to cross-sell between the two entities.
Remaining bridging loan of approximately SGD800mn to be refinanced by Nov-24: The group has decided to delay refinancing the remaining portion of its bridging loan as market conditions are less favourable at the current juncture, given uncertainty over the trajectory of rate cuts by the Fed. However, management has guided for some minor incremental interest savings when the refinancing is completed.
Capital allocation priorities: Deleveraging continues to be SATS’s top priority, with the group targeting SGD200mn of debt repayment in FY25 and another SGD150-200mn annually in subsequent years. Management has stated that they would be comfortable with a gross debt to EBITDA ratio of 3.5-4.0x, which should be achieved within the next two years, in our view. The group has earmarked about SGD300mn for capital expenditure in FY25, with SGD200mn for maintenance capex, and SGD100mn to drive organic growth. Finally, the dividend payout is unlikely to return to the pre-pandemic range of 70-80% (FY24: 40%) as the group can focus on paring down debt and investing in growth opportunities over the medium term.
FY29 revenue target of SGD8.0bn (9.2% CAGR between FY24 to FY29): This will be reached via a combination of organic volume growth across all business segments and improved pricing as the group continues to drive yields higher and focuses on higher-value cargo segments like eCommerce, pharmaceuticals, and other perishables. Additionally, the group plans to execute more bolt-on acquisitions (primarily for new cargo stations to augment their cargo network) or increase their ownership in associates and JVs (similar to what they did with Asia Airfreight Terminals in 2022). The target revenue mix is not expected to materially differ from the current composition.
FY29 ROE target of 15.0%: This is consistent with pre-pandemic levels, ambitious yet achievable. SATS’s current business composition is vastly different from its pre-pandemic era, where food solutions revenue was greater than revenue from cargo and ground handling. One of the key challenges to SATS realising its goal is that operating margins in its food solution business are notably higher (15.5% between FY16-FY20) than its cargo and ground handling business (9.4% in the same period). However, the group’s more optimal capital structure and the asset-light nature of the cargo business with higher asset turnover are two key positives. The real challenge in our view is whether SATS can reach its revenue target of SGD8.0bn with annual capex of just SGD300mn. We will get more colour on this in the upcoming Capital Markets Day towards end-2024.
Earnings and Target Price Update:
FY25/FY26F earnings estimates largely unchanged; raise TP slightly to SGD3.60. Despite the earnings beat in 4QFY24, our updated FY25/FY26F earnings estimates remain intact, as we were already anticipating considerable growth (earnings projections at the top end of consensus) in the group’s earnings over the next two years. We tweaked our FY25/26F revenue estimates higher by 3.1%/5.8% to reflect pricing improvement and stronger volume growth across both segments. However, this is counterbalanced by increased finance costs (after imputing a higher cost of debt to factor fewer rate cuts by the Fed) and tax expenses (effective tax rate could require more time to normalise). Meanwhile, we slash our dividend-per-share estimates (after assuming a lower dividend payout ratio) to 3.0/5.0Scts in FY25/26F from 6.0/9.0Scts previously. Our target price is raised to SGD3.60 from SGD3.40 as we roll forward our valuation peg to FY25F.
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Related Stories
- SATS Ltd: 4QFY24 results above expectations with surprise reinstatement of dividends29 May 2024
- SATS Ltd: 3QFY24 results in-line; FY25/26F earnings estimates largely unchanged despite positive developments due to margin pressures01 Mar 2024
- SATS: 1HFY24 results in line, with encouraging signs of recovery in the cargo handling segment15 Nov 2023