SATS - CGS-CIMB Research 2022-11-10: Better Operating Leverage; Likely No Strategic Investor

SATS - Better Operating Leverage; Likely No Strategic Investor

SATS LTD. (SGX:S58) | SGinvestors.ioSATS LTD. (SGX:S58)
  • 2QFY23 (Jul to Sep 2022) revenue came in at S$429m (+14%), suggesting that SATS (SGX:S58) is benefitting from the reopening of borders. Food solutions revenue rose 13% q-o-q to S$186m while gateway revenue rose 40% q-o-q to S$189m (including the consolidationf of AAT). Flights and passengers handled in 2Q were at 62%/56% of pre-COVID-19 levels of 1HFY20.
  • SATS's 2QFY23 operating loss narrowed to S$8m (1Q23: S$34m) vs our S$25m loss forecast.
    • The key positive variance in 2Q was lower-than-expected staff cost (+3% q-o-q), as the hiring momentum to prepare for the reopening of borders has tapered. Total staff strength grew 6.8% q-o-q to 15.6k at end-Mar. Note that staff costs rose at a pace of ~22% q-o-q in the preceding two quarters.
    • Raw materials costs declined to 37.8% of food solutions revenue in 2QFY23, vs above 40% in the past quarters, on the back of better operating leverage.
    • Share of associates and JVs contribution also surpassed our expectations at S$10.7m (+55% q-o-q), with food solutions posting S$3.4m net profit, its first since COVID hit.
  • Excluding grant (S$9.8m) and M&A expenses (~S$15m), SATS's 2QFY23 net loss would have been at ~S$6m, closer to break-even.
  • There will still be more M&A expenses to be incurred in 2HFY23F (quantum undisclosed), but we project a profitable 2HFY23F as management expects Changi aviation volume to reach 80% by end-FY23.
  • SATS shared that the optimal funding structure to fund its acquisition of Worldwide Flight Services (WFS) would likely be a rights issue for ~S$800m, ~S$700m from 3-5-year term loans, and ~S$300m cash. As at end-Sep, SATS's cash balance stood at S$689m, net cash at S$174m.
    • SATS will only consider issuing hybrid securities to strategic investors and/or long-term financial investors if the terms are favourable.
    • We believe the cost of placement is probably higher than the competitive interest rates offered to SATS (we estimate ~4%).
  • We keep our target price for SATS unchanged, pending a definitive funding structure for its WFS acquisition. Our target price is based on 18x CY24F SATS’s business-as-usual net profit as well as WFS profit post refinancing. 18x is 0.5 standard deviation below its 2013-2018 pre-COVID average.
  • SATS's share price has shrunk ~29% since it announced its proposed acquisition of WFS, pricing in worst-case funding structure of S$1.7bn rights issue (at S$2.79/share). Long-term investors should stay invested, in our view.

Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @

TAY Wee Kuang CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | 2022-11-10
SGX Stock Analyst Report ADD MAINTAIN ADD 3.450 SAME 3.450

Previous report by CGS-CIMB:
2022-10-05 SATS - Exploring Funding Options For WFS Acquisition

Target prices by 3 other brokers at SATS Target Prices.
Listing of broker reports at SATS Analyst Report.

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SATS Dividends & Corp Actions,
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