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SATS' ROE expected to return to 13%-15% by FY2025: CGS-CIMB

Chloe Lim
Chloe Lim11/15/2021 05:36 PM GMT+08  • 3 min read
SATS' ROE expected to return to 13%-15% by FY2025: CGS-CIMB
CGS-CIMB analysts lower TP for SATS to $4.32 while maintaining "hold" rating
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CGS-CIMB Research has maintained its “hold” rating on SATS with a lower target price of $4.32, according to analysts Lim Siew Kee and Tay Wee Kuang.

In addition, Lim and Tay were “cautiously optimistic” that ROE could return to 13-15% by FY2025 with potential lower margin trend in the near-term.

SATS reported earnings of $6.8 million for 2Q, a turnaround from losses of $33.2 million last year.

See: SATS begins work on central kitchen in India; expected to be operational in 2023

However, the bottom line was lifted by government support, without which, SATS would be $30.1 million in the red.

SATS notes that its strategy to grow its non-travel related revenue has shown results with a revenue increase of 27% y-o-y hit nearly half, or 47%, of its total revenue in 2Q.

See also: Choo Chiang rides the construction boom

Given the “persistent and significant uncertainties”, SATS will not pay an interim dividend this time round, where resumption of dividend payments would be contingent on positive EBITDA and net profit, excluding grants. As a result, Lim and Tay move towards removing the DPS for FY2022.

Shares of associates and JV swung from a loss of S$1.2 million in 1QFY2022 to a profit of S$2.1 million in 2QFY2022, driven mainly from the cargo business in Indonesia. Food solutions associates/JV losses also narrowed q-o-q in 2QFY2022, said analysts.

Moving forward, SATS expects to see lower reliance from travel, as revenue split for travel/non-travel will be 65%/35% (where previously 85%/14% FY2019), and for gateway/food solutions will be 40%/60% (it was previously 54%/46% in FY2019) by FY2025, according to the analysts.

See also: UOBKH ups Raffles Medical's TP as its transitional care facilities join Singapore's healthcare ecosystem

“We think SATS’s three-year revenue target of $3 billion by FY2025 is achievable, assuming a 100% pre-Covid travel recovery and successful M&A strategy,” says Lim and Tay. The analysts also assume that SATS’s inflight catering revenue will recover to 99% of pre-Covid-19 levels by FY2024.

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SATS also reset its $1 billion investment/capex target over three years--a plan that was shared in its previous 2019 capital market day, but was stalled by Covid-19. This includes $200 million to $240 million of maintenance capex ($70 million- $80 million p.a.) leaving $800 million for mergers and acquisitions (M&As). Lim and Tay believe that there is a strong pipeline of targeted assets here. “We believe India and China could still be key focus markets,” they said.

“Assuming a two-year gestation and high single-digit returns expectations, an annual S$200 million-250 million p.a. of M&A could add up to $20 million of profit, or 6% to our FY2024 earnings per share.”

The analysts noted that key risks or catalysts would be slower or faster-than-expected border reopenings contingent on ever-fluctuating Covid-19 levels.

Shares in SATS closed at 4 cents or 0.97% lower at $4.10 on Nov 15.

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