Better known as the firm behind the trays of inflight food most travellers encounter in happier times, food and gateway solutions firm SATS has undoubtedly been hard hit by the Covid-19 pandemic. But with vaccines now quickly on their way, analysts anticipate better performance in its cargo business as it wings the “jabs” across the region. 

“Management shared that SATS has handled inbound and transhipment of Covid-19 vaccine shipments across Asia. With the rollout of vaccines, we believe that SATS is poised to benefit from vaccine shipment as a Certified pharma handler and a gradual recovery of travel demand ahead,” remarks OCBC equity researcher Chu Peng in a Feb 11 broker’s report.

SATS’s pure cargo handling associates in Hong Kong, India, Taiwan and Indonesia have also benefited from the vaccine shipments, says Lim Siew Khee, Head of Research at CGS-CIMB. She notes that these gateway associates have turned a profit of $7.9 million 3QFY2021 as compared to a loss of $1.7 million in 2QFY2021. 

More generally, cargo has been a “bright spot” for SATS, with cargo volume falling 33.9% y-o-y compared to the 54.9% y-o-y drop in meals served in 3QFY2021. Cargo was helped by demand for essential sectors and a sharp fall in aircraft belly cargo capacity. This drove air-freight rates beyond historical averages, with volume seen to return to 2019 levels by April. 

“Gateway revenue of $105 million came largely from cargo handling. Management believes there is scope for better operating leverage for cargo to return to pre-Covid levels in 2018. EBIT margin for cargo is generally higher in the mid-teens,” comments Lim in a Feb 11 report headlined “Bottomed out”. 

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Still, SATS saw losses in 3QFY2021, with its revenue for the quarter falling 54% y-o-y to $251 million due to a 67.1% y-o-y decline in aviation revenue. 3QFY2021 PATMI losses narrowed, however, from $33.2 million in 2Q to $2.8 million due to strong cargo performance and government relief. 9MFY2021 PATMI losses were $79.7 million - in line with Chu’s expectations. 

Lim of CGS-CIMB, however, believes that SATS would have performed better without an additional $22.5 million in impairment expenses. These included $11.5 million spent on PPE and another $11 million impairment loss from an associate. With the impairment cost of PPE factored in with normal operating expenses in accounting, Lim says that underlying profit for 3QFY2021 could have been $19.7 million if the PPE impairment costs had been excluded. 

“The strength came from associates’ profit of $3.5 million (vs. our expected loss of $10 million), lower finance expense and taxes. 9M core loss stood at $37 million vs. our FY21F core loss of $36 million; we expect a recovery in 4Q21F,” writes the CGS-CIMB investment head. She considers the 9% q-o-q revenue increase to $251 million within expectations. 

But one challenge faced by SATS is its higher operating expenditure, standing at $247 million - 11% higher than Lim’s forecast. This came from higher raw material costs (up 11% q-oq) and a tapering of government relief from $78 million in 2QFY2021 to $69 million in 3Q. 

“In 4QFY21F, we factor in staff costs increasing by 15% qoq as government relief tapers. SATS has demonstrated aggressive cost reduction as headcount was reduced to 11,800 vs. 18,000  a year ago. We expect some form of government relief to be announced in Singapore’s upcoming budget on Feb 16,” predicts Lim.

Going forward, Chu notes that with the global vaccine rollout and re-opening of international borders still some time away, SATS may have to rely on its non-aviation business segment such as institutional and commercial catering and cargo services to support revenue growth. This segment contributed 17% of FY2020 revenue and 44% of 9MFY2021 revenue. 

In absolute terms, non-aviation revenue remained largely unchanged in 3QFY2021, remarks Lim. It saw only a 0.8% decline in revenue y-o-y compared to aviation’s 67.1%. SATS, says the CGS-CIMB investment head, its continuing efforts to expand its non-aviation revenue stream. 

Both analysts have maintained “buy” calls on the counter. Chu has raised her fair value estimate from $4.31 to $4.95 while Lim has indicated a target price of $4.30. 

As of 1.58pm, SATS is trading 0.73% down at $4.09. It offers a present dividend yield of 4.65%.