CGS CIMB upgrades Sats to ‘add’, citing strong revenue momentum

SINGAPORE – Ground handler and in-flight food services company Sats is enjoying a quarter-on-quarter improvement in its performance, thanks to a strong recovery in air travel demand and increasing contributions from associates and subsidiaries.

The strong revenue momentum should sustain profitability in the quarters ahead, especially given the peak travel season ahead, said CGS CIMB in a report. The brokerage lifted its recommendation on the stock from “hold” to “add”, with a $3 price target.

In contrast, Phillip Securities downgraded its call on the stock to “reduce” and cut its target price to $2.23 from $2.51.

Meanwhile, Citi upgraded the stock to “buy” from “neutral”, with a higher price target of $3.10.

Sats shares on Tuesday surged 15 cents, or 5.9 per cent, to $2.71 at 10.52am, before closing the day at $2.66.

Last Friday, Sats posted a net loss of $7.8 million for its first half of financial year 2024 ended September, narrowing from a net loss of $32.5 million in the corresponding year-ago period. But for the second quarter alone, the mainboard-listed group delivered $22.2 million in net profit – its first earnings without government relief since the Covid-19 pandemic struck in early 2020. It had recorded a first-quarter net loss of $29.9 million. 

“We think the continued recovery in the aviation industry would drive meals served on flights for Sats, resulting in the segment’s Ebit (earnings before interest and taxes) margins reverting towards financial years 2018-2020’s average of 14.7 per cent by financial year 2025F (forecast),” CGS CIMB analysts Tay Wee Kuang and Lim Siew Khee wrote in their Nov 13 report.

Phillip Securities analyst Peggy Mak, however, noted that the group’s food solutions segment remained in the red despite its recovery in revenue to pre-Covid-19 levels. She also cautioned that Sats might require higher working capital due to its acquisition of larger European rival Worldwide Flight Services (WFS).

The company’s stock has been depressed for much of 2023 following the purchase of WFS for €1.3 billion (S$1.9 billion) in April.

Sats said the acquisition would make it a truly global player of scale.

Some market insiders have fretted that the purchase of a much larger global competitor would cause “financial indigestion” and depress Sats’ financials for years to come.

In addition to debt and internal funding, the deal was partially financed by an $800 million Sats rights issue, which caused dilution to its share base and depressed the stock price. 

In upgrading the stock, CGS CIMB cited as a re-rating catalyst the stronger revenue momentum for the aviation industry that is driving better operating leverage and positive cashflow leading to a resumption of dividends.

“As we enter the year-end travel season, we see better quarters ahead for Sats,” the brokerage noted. “We increased our financial year 2024F EPS (earnings per share) by 121.2 per cent as Sats has returned to profitability one quarter ahead of our expectations, while revising our financial years 2025F and 2026F EPS upwards by 49 per cent and 22.4 per cent respectively, as we see better operating leverage.”

CGS CIMB, however, did note downside risks of deteriorating cash generation, as well as a possible recession affecting the aviation industry.