Analysts at DBS Group Research and PhilipCapital have kept their &ldquo buy&rdquo and &ldquo neutral&rdquo calls for SATS S58 -0.4% after the aviation company&rsquo s results for the 1QFY2024 ended June.

 

The analysts have also kept their target prices unchanged at $3.20 and $2.51 respectively.

 

On Aug 15, SATS reported its first set of results for the three-month period since the successful acquisition of Worldwide Flight Services (WFS) back in April.

 

Group revenue surged by $823.1 million to reach $1.2 billion in the 1QFY2024, a significant upswing from the $375.5 million recorded in1QFY2023. This boost was primarily fueled by the revenue infusion from WFS and the rise in the volume of managed flights, which has now rebounded to 81% of pre-covid levels.

 

However, the group reported a net patmi loss of $29.9 million, considering the exceptional costs linked with the integration of WFS.

 

With the exclusion of integration-related unique expenses however, the underlying core patmi loss narrowed down to $17.4 million, demonstrating an improvement over the loss of $19.5 million in 1QFY2023, which had included government assistance totalling S$9.4 million.

 

In his Aug 16 report, DBS&rsquo s Jason Sum noted that SATS&rsquo s 1QFY2024 earnings were largely within his expectations, accounting for about 20% of his full-year estimates. The group&rsquo s revenue for the quarter stood at 23.6% of his full-year expectations.

 

The analyst has remained fairly optimistic on the group&rsquo s outlook, observing that the sustained recovery in global air passenger traffic and growth in non-travel food business will drive SATS&rsquo s earnings momentum.

 

&ldquo Although a deceleration in SATS&rsquo s cargo business is on the horizon, we foresee the group&rsquo s ground handling and in-flight catering businesses benefitting from the global recovery in air travel,&rdquo he writes.

 

The analyst also points out that the group&rsquo s non-travel-related food business should also register healthy growth, attributing it to the group&rsquo s expanding product portfolio and customer base, as well as increased production capacity and footprint.

 

Notably, Sum expects the acquisition of WFS to start yielding operational and financial synergies over the next few years, which he deems are &ldquo critical to drive re-rating&rdquo .

 

He writes: &ldquo SATS has completed the refinancing of WFS&rsquo s costly debt, with meaningful interest savings to materialise from FY2025. More importantly, the market will be paying attention to the assimilation of WFS, and whether the group can achieve its intended operating synergies within its projected timeline, to justify the hefty price tag on WFS.&rdquo

 

At present, the analyst likes the present-reward set up and anticipates a 20% to 25% upside from the current share price level. Sum is also projecting SATS&rsquo s core earnings per share (EPS) to reach 15.1 cents in FY2025, representing 67% of its FY2019 level.

 

Sum&rsquo s blended valuation framework incorporates both forward ev/ebitda multiple (pegged to 11.4x FY2024 ebitda) and a discounted cash flow valuation.

 

Key risks noted by the analyst include macroeconomic instability that could delay the normalisation of air passenger traffic or negatively impact air cargo volumes, also including that there are potential execution risks associated with integrating WFS and achieving the anticipated synergies.

 

Meanwhile, PhillipCapital analyst Peggy Mak has taken on a dimmer take as SATS&rsquo s acquisition costs weighed on its 1QFY2024 earnings.

 

That said, Mak notes that the group&rsquo s net loss of $0.2 million excluding integration costs and amortisation expenses relating to the acquisition of WFS were &ldquo in line&rdquo with her expectations.

 

Mak points out that although WFS&rsquo s volume has declined in line with softer cargo demand, yields are holding up.

 

The analyst opines that although SATS&rsquo s core operations turned in a profit, even with the expiry of government relief, the ebit margin of 3.4% is &ldquo still a far cry&rdquo from the pre-Covid level of 16% to 17%.

 

On the group&rsquo s net debt of $2.2 billion as compared to $0.77 billion in March last year, Mak notes that SATS&rsquo s higher interest expense &ldquo cancelled out all the operating gains.&rdquo

 

&ldquo The outlook is mixed,&rdquo she adds, noting that positives include the improvement of aviation-related profits with inflight meals restoring to pre-Covid levels, a reduction in double-catering and an increase in the number of flights.

 

Conversely, negatives include continued sluggish air cargo volume from lower manufacturing output and trade activities and a drag on earnings due to higher interest expense.

 

Mak has lowered her net earnings estimates for FY2024 by 49% to factor in acquisition-related costs.