• 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).