• SATS has successfully repriced the contract of one of its major customers, SIA, which accounted for 17.3% of FY24 revenue. The new contract took effect in 2Q25, and we expect at least a 5% rise, generating around S$45mn revenue. An additional S$6mn to S$9mn in revenue expected from the new cargo handling fee for inbound air cargo into Singapore, effective August 2024. Expect repricing to have direct benefit to earnings.
• SATS is fully capitalizing on the recovery tailwind of the airline industry and the spillover effects from the Red Sea conflicts. Cargo volume increased by 19% YoY in 1Q25, and while we expect some moderation from 2Q25 onwards, this should be partially offset by the new revenue source from partnerships in Europe, such as with SF Holding and additional warehouse in Spain. We expect that SATS will continue to outperform the industry average growth rate in FY25, with volume expected to increase by c.15% YoY.
• Upgrade to BUY with a higher DCF-TP of S$4.37 (prev: S$3.45). We have lowered our WACC assumption by 10% to 8.4%, driven by the improving operating leverage and reduced customer risk from the integration of WFS. There is no change to our earnings forecast. 

• 1Q25 revenue was slightly above our estimates at 27% of our FY25e forecast and rose 15.5% YoY to S$1.37bn. Revenue growth came from cargo tonnage and aviation meals volume, which scaled by 19.0% and 26.8% YoY respectively. 
• PATMI of S$65mn, exceeded our estimates and reached 40% of our full-year forecast driven by stronger performance from share of earnings of associates and joint ventures (SoAJV), higher business volumes and a one-off gain of S$7.2mn from the settlement of an existing loan arrangement. We believe repricing with SIA boosted margins.
• Upgrade to NEUTRAL with a higher DCF-TP of S$3.45 (prev: S$2.66). We have raised our FY25e revenue forecast by 10%, driven by increased cargo and food rates due to the continued recovery in the airline industry and the pronounced synergies from the acquisition of WFS. FY25e PATMI raised by 54% to reflect the increasing contribution from SoAJV and one-offs. We expect the revenue catalyst to continue coming from the air cargo segment, driven by sustainable e-commerce demand and spill over effects from various geopolitical tensions. SATS is currently trading at 22x FY25e PE, we believe much of the catalyst has already been priced into the current share price.

• SATS reported 3Q24 net profit of S$31.5mn, which included S$3.1mn profit from WFS. The 9M24 net profit of S$23.7mn is in line with our FY24e estimates of S$66mn, before an estimated S$30mn amortization of intangible assets. The amount will be finalized in March 2024.
• SATS group operations (excluding WFS) have nearly returned to pre-pandemic volume – flights handled was 86%, meals served, cargo handled and ground handling were 94% to 99% as of Dec 2023. Looking ahead, growth will be led by overseas operations in China, India and Indonesia, and lower interest costs through refinancing of debt. Net debt was flat QoQ at S$2.2bn, and net gearing was 0.9x.
• Maintain our FY24e earnings forecast and REDUCE call. We raised our DCF-derived TP to S$2.31 (prev. S$2.23), as we roll over to the next financial year.

The Positives

• SATS continued to improve on net profit by 45%, QoQ, due to continued recovery in air travel demand and 3Q being a seasonally strong quarter for aviation and cargo. Associates’ contributions improved, led mainly by India, Hong Kong, and Frankfurt.

The Negatives

• 3Q24 EBIT margin of 8.8% is still below the mid-teens level during pre-pandemic. The aviation industry has pressures from manpower crunch. With the inclusion of WFS, staff costs have risen by 241% YoY in 9M24 and now account for 60% of total expenditure (9M23: 49%).
• Net debt is flat QoQ at S$2.2bn as at Dec 23. Of these, about €580mn (S$847mn) matures in May 2024 and needs to be refinanced.
• 3Q24 annualised ROE at 5.4%. This is dragged down mainly by WFS, contributed only S$3.1mn to 3Q24 net profit.

• The results were in line with our expectations, though the mix was disappointing. Food solutions remained in the red with operating loss of S$0.9mn despite recovery in revenue to pre-Covid levels. WFS contributed operating profit of S$73mn for the first time, or operating margin of 5.1%. 2Q24’s net profit turned around to S$22.2mn (1Q24: net loss S$29.9mn). This was also due to lower depreciation charge of about S$20mn.
• EBIT barely covered the higher interest expenses on debt incurred for the acquisition. Net debt as at end Sep 2023 was S$2.3bn or net gearing of 0.9x.
• Maintain our earnings forecast, but downgrade to REDUCE (from NEUTRAL) and a lower TP of S$2.23 (prev. S$2.51), to factor in higher working capital at WFS.

The Negatives

• SATS-only operating margin was just 0.3%. Excluding the contribution from Worldwide Flight Services (WFS), operating profit was S$3mn. Despite revenue returning to the pre-Covid level of 1H20, food solutions incurred a marginal operating loss of S$0.9mn We believe the key reasons were 1) rise in operating costs, chiefly staff costs due to a manpower shortage in Singapore and Hong Kong; 2) fall in revenue from non-aviation (-13.8% YoY) due to lower catering and distribution demand. Flights at Singapore Changi Airport have been restored to about 89% of pre-Covid levels. Further growth is limited given the manpower and capacity bottlenecks faced by airlines. Thus, we are concerned that further improvement in food solutions earnings could be muted.

• 1H24 EBIT barely covered interest expenses. Net debt rose to S$2.3bn and net gearing of 0.9x after the acquisition of WFS.

The Positive

• Cargo volume reversed into growth in August and September. If the momentum sustains, operating leverage from higher volume could lift overall operating margin from 3.1% currently.

Outlook

Rising costs and interest expenses could impede earnings recovery. Working capital needs could rise with the inclusion of WFS. We downgrade to a REDUCE recommendation (from Neutral) and DCF-derived TP of S$2.23 (prev. S$2.51).

• SATS slipped into net loss in 1Q24, after booking S$29.7mn integration costs and amortization expenses relating to the acquisition of WFS. Excluding these, net loss was S$0.2mn, which was in line with our expectations. Operating gains were cancelled out by higher interest expense.
• SATS’ core operations turned in a profit, even with the expiry of government relief, though EBIT margin of 3.4% is still a far cry from pre-COVID level of 16%-17%. WFS’ volume declined in line with softer cargo demand, but yields are holding up.
• Maintain NEUTRAL recommendation and TP of $2.51. We lowered FY24e earnings forecast by 49% to take into account the integration costs.

The Negatives

- Acquisition-related costs weighed on earnings. WFS was consolidated for the first time. It incurred a one-off integration cost (S$12.6mn), amortization of intangible assets (S$9.1mn), lease expenses (S$7.4mn) and cost for refinancing of WFS’ bonds (S$0.6mn). The final amount of intangible assets will be determined in 2H24e. The annual amortization could change.

- Net debt rose to S$2.2bn (Mar 23: S$0.77bn). Higher interest expense cancelled out all the operating gains. Free cash flow was negative S$10.7mn in 1Q24.

- Volume handled by WFS has declined in tandem with the decline in global air cargo demand. However, the industry decline is moderating (Jun 23: -3.4% YoY, YTD: -8.1%).

The Positive

+ SATS-only operations were profitable, though it no longer enjoy government relief.

Outlook

The outlook is mixed. Aviation-related profits could improve with 1) inflight meals restoring to pre-COVID levels; 2) reduction in double-catering; and 3) increase in number of flights. On the other hand, air cargo volume might remain sluggish from lower manufacturing output and trade activities. The higher interest expense is a drag on earnings.

• FY23 revenue grew 49.4% YoY, which included a full-year contribution from 65.4%-owned HK cargo handler AAT. However, operating loss rose 12.7% YoY, dragged down by cost escalation (+48.1% YoY), S$44mn in M&A expenses, and weak performances from AAT, Malaysia ground handling and Saudi Arabia cargo handling. Net loss would be S$77.6mn if government relief were excluded.
• Staff costs surged by 62.0% YoY, a combination of inflationary pressure and restoration to full capacity ahead of the recovery in flight volume. As at March 2023, the number of flights at Changi Airport was 25% below pre-pandemic level.
• Balance sheet has turned into net debt, with net gearing at 0.33x. Consolidation of Worldwide Flight Services (WFS) could raise FY24e net gearing to 0.84x, we estimate.
• Maintain NEUTRAL with a lower target price of $2.51 (prev. $2.92). We see multiple headwinds ahead: 1) Slowdown in air cargo volume; 2) higher interest expense from the acquisition cost and debt at WFS; 3) air travel demand might plateau from 2H24e with rising recessionary risks.

The Negatives

- Cost escalation weighed on earnings. SATS reported higher operating loss of S$48mn (2H23: loss S$5.7mn) despite a 49.4% YoY gain in revenue, partly due to the consolidation of 65.4%-owned HK cargo handler Asia Airfreight Terminal which incurred losses. Total expenditure surged 48.1% as SATS restored to full capacity in anticipation of the ramp-up in flights by the air carriers. The number of commercial flights operating at Changi Airport was still 25% below pre-pandemic level in Mar 2023. Net loss excluding government relief was S$77.6mn. Staff costs rose 62% YoY and now account for 50% of total costs (FY22: 45%). Total employee count has returned to pre-pandemic level of 17,100. Higher inflationary pressure also lifted the cost of raw materials (+25.8%) and fuel and maintenance (+45.8%). SATS also incurred S$44.5mn for expenses relating to the acquisition of WFS.

- Mixed performance in the overseas markets. An uneven recovery in aviation in Asia and weaker cargo volume affected operations in Hong Kong, Malaysia and Saudi Arabia. Still, SATS is expanding central kitchen capacities in China and India to produce ready-to-eat meals for an uplift in international air travel and domestic consumption in these countries.

- Balance sheet turned into net debt of S$772.1mn, or net gearing of 0.33x. It has set aside S$1.8bn for the acquisition of WFS, which will be consolidated from FY24e. 

The Positive

+ Nil

• 9M23 revenue in line, at 80.7% of FY23e. Its profitability continued to recover with core PATMI excl. reliefs at -$13.7mn vs. -$33mn in the same period last year.
• SATS shareholders will be allotted rights to subscribe for 323 rights shares for every 1,000 existing shares held at the price of $2.20 per rights share, representing a 16% discount to TERP.
• Funding clarity and all necessary approvals from all jurisdictions received should lead to a re-rating of the Company post rights-issuance.
• Maintain NEUTRAL with lower target price of $2.92 (prev. $3.08). We trim FY24e earnings by 3% as we account for higher share base from a lower-than-expected rights price. Our valuation is pegged to 20x FY24e. Risks to our view include 1) Integration challenges for WFS; and 2) revenue growth continuing to lag behind expenses growth.

The news

SATS announced that it will undertake a renounceable, underwritten rights issue to raise gross proceeds of approximately $798.8mn to partially fund its acquisition of WFS. Entitled shareholders will be allotted rights to subscribe for 323 rights shares for every 1,000 existing shares held at the price of $2.20 per rights share, representing a discount of 16% to TERP.

The Positives

+ 9M23 revenue in-line, at 80.7% of FY23e. Seasonally strong 3Q23 revenue grew 54.5% driven by aviation recovery and Asia Airfreight Terminal (AAT) consolidation. Flight volume and air travel continue to recover as travel restrictions around the world eased. Its profitability continued to recover with core PATMI excl. reliefs at -$13.7mn vs. -$33mn in the same period last year driven by improved passenger-related operating statistics. We use core PATMI excl. reliefs as a measure of the Group’s profitability as this excludes one-off acquisition expenses and temporary government relief.

+ All necessary approvals from all jurisdictions received. With all the regulatory conditions for the transaction having been satisfied, SATS’ proposed acquisition of WFS is expected to close on 3 April 2023. The acquisition will strengthen SATS leading positions in strategic hubs connecting key trade lanes across North America and Europe, complementing its operations in Asia Pacific.

+ Funding clarity remove overhang. With the launch of the $800mn equity fund raising, we believe the overhang on the Company will be removed. At $2.20/rights share, this translates to an implied 15x FY24e (Figure 1), -1sd below its historical average P/E, which is attractive in our view. The theoretical ex-rights price (TERP) post-issuance is $2.62. Our target price of SATS represents a 11% upside to TERP.

The Negatives

- Higher share base post-completion from a lower-than-expected rights price. We had previously assumed a rights issue price of $2.29 based on a 15% discount. The steeper discount however, meant a slightly bigger dilution (-2%) to our FY24e earnings.

• SATS has provided more clarity on its funding structure for the Worldwide Flight Services (WFS) acquisition. We believe the added clarity will further reduce the overhang on the stock.
• With access to an acquisition bridge facility and the rights issue underwritten, we do not expect the discount for the rights to be steep.
• Downgrade to NEUTRAL from recent run-up in price with higher target price of $3.08 (prev. $3.02). Our valuation is still pegged to 18.5x FY24e. Risks to our view include 1) Integration challenges for WFS; and 2) revenue growth continuing to lag behind expenses growth.

The news

SATS provided more details on its funding plan for the proposed acquisition of WFS.

The $700mn in term loan will comprise a 3-year Euro-denominated term loan with an all-in cost of 4-4.5% per annum based on prevailing Euribor.

The proposed rights issue is expected to be launched in 1Q23, subject to shareholders’ approval of the proposed acquisition at an EGM.

The Positives

+ Less concerned on discount of rights. With access to an acquisition bridge facility and the rights issue underwritten, we do not expect the discount for the rights to be steep. SATS had previously obtained an acquisition bridge facility of up to €1,200 million (approximately S$1,657mn) to fund and complete the proposed acquisition.

+ $700mn Euro term loan at 4-4.5% lower than our 5.5% forecast. We view the term loan positively, as it provides a natural currency hedge, and is also lower than we previously modelled. We tweaked our model slightly, taking the mid-point of the Euro term loan at 4.25% to lower our FY24e interest cost by approximately ~$7mn. The interest rates are also lower than the average 8-9% cost of debt currently borne by WFS.