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Analysts mixed on Sats, saying WFS acquisition as 'promising', but note elevated gearing in the near term

Lim Hui Jie
Lim Hui Jie11/17/2022 02:10 PM GMT+08  • 5 min read
Analysts mixed on Sats, saying WFS acquisition as 'promising', but note elevated gearing in the near term
OCBC's Chu has still maintained her 'buy' call, however. Photo: Albert Chua/The Edge Singapore
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Analysts from three brokerages have given mixed calls on Sats in the wake of its 1HFY2023 results (ended 30 September) released on Nov 9.

UOB Kay Hian has maintained its "buy" call and target price of $3.08, while Nomura's Global Markets Research analysts Ahmad Maghfur Usman and Divya Thomas have also maintained its "buy" call and $4.94 target price.

On the other hand, OCBC Investment Research (OIR) analyst Chu Peng has kept her “buy” rating, but has cut its target price by about 30% from $4.72 to $3.26.

In his report, UOBKH analyst Roy Chen notes that Sats had recorded a "meaningful improvement in core profitability," saying that Sats recorded headline net losses of $9.9 million in 2QFY2023.

Stripping out a one-off disposal gain of $1.9 million and government reliefs of $11.4 million, Sats’ 2QFY2023 core net loss stood at $21.6 million.

He highlights that its 2QFY23 performance was also affected by the recognition of $15 million worth of professional fees related to Sats's proposed acquisition of global cargo handler World Flight Services (WFS) acquisition.

See also: Sats reports 1HFY2023 loss of $32.5 million, proposed rights issue to be capped at $800 million

"Excluding this expense item, Sats’ 2QFY2023 ex-relief core net losses would have been $5 million to $10 million, a meaningful improvement over 1QFY2023’s ex-relief core net loss of $31.9 million," Chen says.

Chen expects a turnaround for Sats in 3QFY2023, saying that he expects the company to return to "core profitability" next quarter, as it heads into the year-end peak travel season.

In Singapore, which is Sats's home market, passenger volume at Changi Airport is estimated by Chen to be on track to reach about 75% of pre-pandemic levels in 3QFY2023, compared to about 57% in 2QFY23.

See also: Sats reopens Inflight Catering Centre 1 as travel demand rebounds

The expected higher passenger volume, together with operating leverage should help return Sats to core profitability.

Separately, OIR's Chu also noted that Sats's 2QFY2023 revenue rose 46% y-o-y or 14.2% q-o-q to $429 million, boosted by stronger performances from both its food solutions and gateway services segments.

The company’s operating metrics also improved in 2QFY2023, with its volume of flights handled, meals served, and passengers handled recovering to 62%, 75% and 56% of pre-pandemic levels respectively.

On the other hand, cargo demand weakened in 2QFY2023 with a 2.6% q-o-q drop in volume, mainly due to the supply chain strain in China.

In her report, Chu says she expects Sats to break even in 2HFY2023, slightly later than Chen's 3QFY2023 estimate, as the company is poised to benefit from the recovery in passenger traffic at Changi Airport, which is on track to reach 80% of pre-Covid levels by the end of 2022.

WFS acquisition takes center stage

Most notably, during the update, Sats also revealed that it plans to finance the $1.8 billion acquisition of global air cargo handler Worldwide Flight Services via a combination of rights issues not exceeding $800 million, term loans of about $700 million, and internal cash resources of about $320 million.

For more stories about where money flows, click here for Capital Section

The acquisition will make Sats the largest cargo handler in the world.

Nomura's Ahmad and Thomas have a "neutral" view on the acquisition, although they say that this "elevates Sats as a global leader."

They also note that the company considers this funding plan to be optimal, adding that Sats's management did say it was evaluating term loan proposals from its bankers.

While no details were forthcoming about the denomination of the loans or possible costs, Sats's management expects it to be not too different from its existing debt, with Ahmad and Thomas expecting that the tenor for the term loans is likely to be about three to five years.

Chu estimates that this will increase Sats’s pro-forma net gearing to about 0.9x, although UOB KH's Chen points out that its management is confident that the operating cash flow of Sats and WFS will cover the interests and principal repayment.

Chu adds that the proposed acquisition is “likely to benefit Sats over the long run”, given WFS’s status as a global leader in cargo with a complementary portfolio to Sats.

She is of the view that investors with a long-term investment horizon may stay invested in Sats, but warns that the potential rights issue remains an overhang and will weigh on its near-term share price performance.

Chen also notes a change to his investment thesis, saying that he expects Sats to become a stock that has more of a balance of growth and yield, compared to the previous market perception of Sats being a stable yield play (with a 70-80% dividend payout ratio) backed by a strong balance sheet.

He says, "With the elevated net gearing, Sats is likely to moderate its dividend payment and utilise more of the surplus operating cash flow to pare down the debt."

The Nomura analysts also share the same view, pointing out that "given the increase in gearing post the new term loans, we think the

company may reduce dividend payout in the future."

As at 1.03pm, shares of Sats were trading at $2.72, with a forecasted FY2023 P/B ratio of 1.8 and dividend yield of 1.1%, according to OIR

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