SATS - Phillip Securities 2023-06-04: Acquisition Costs & Cargo Weakness Overshadow Recovery

• SATS (SGX:S58)'s FY23 revenue grew 49.4% y-o-y, which included a full-year contribution from 65.4%-owned HK cargo handler AAT. However, operating loss rose 12.7% y-o-y, dragged down by cost escalation (+48.1% y-o-y), S$44mil in M&A expenses, and weak performances from AAT, Malaysia ground handling and Saudi Arabia cargo handling. Net loss would be S$77.6mil if government relief were excluded.
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• SATS' 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.
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• higher interest expense from the acquisition cost and debt at WFS;
• 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$48mil (2H23: loss S$5.7mil) despite a 49.4% y-o-y 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$77.6mil.
• Staff costs rose 62% y-o-y 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$44.5mil for expenses relating to the acquisition of WFS.

Mixed performance in the overseas markets.

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Peggy Mak Phillip Securities Research | https://www.stocksbnb.com/ 2023-06-04 SGinvestors.io

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