Sats&rsquo market cap goal of S$10 billion translates to a price of S$6.71 a share, at the current level of ordinary equity

 

INFLIGHT caterer and ground handler Sats : S58 0% has set for itself some ambitious targets, after posting an improved set of financial results for FY2024 to March.

 

Its full-year revenue hit a record S$5.1 billion, and its net profit climbed into positive territory &ndash at S$56.4 million &ndash for the first time since the pandemic devastated the aviation sector in 2020.

 

The announcement of Sats&rsquo FY2024 results was closely watched by the industry, given that it was the first full year that included the contributions from air-cargo handler Worldwide Flight Services (WFS). The company was brought into the fold in April 2023, after an acquisition at an enterprise value of 2.3 billion euros (S$3.4 billion).

 

Post-acquisition, Sats is now aiming to pull in over S$8 billion in revenue by FY2028, and also attain a return on equity (ROE) of 15 per cent, and achieve a market capitalisation of S$10 billion after FY2028. These figures give an insight into Sats&rsquo expectations about its net profit and share price in the coming years.

 

S$8 billion revenue

For Sats to achieve its top line target of over S$8 billion in revenue by FY2028, the group would have to improve its turnover by 12 per cent every year for the next four years.

 

Analysts from UOB Kay Hian (UOBKH) and CGS International, which have forecasts for Sats up to FY2027, expect the group&rsquo s revenue to come in at about S$6.3 billion for that year. This means that Sats would have to raise its turnover by S$1.7 billion year on year in FY2028 to hit its target.

 

The research teams from DBS and OCBC have forecasts up to FY2026. DBS projects Sats&rsquo FY2026 revenue to hit about S$6 billion OCBC&rsquo s top line forecast for that year is S$5.8 billion. These figures mean Sats would have to make up for a shortfall of as much as S$2.2 billion in two years over FY2027 and FY2028.

 

15% ROE

The ROE goal offers investors an idea of what Sats would like to achieve for its net profit, the numerator for the profitability metric.

 

If the group wants to achieve an ROE of 15 per cent as early as FY2028 &ndash up from FY2024&rsquo s 2.4 per cent &ndash the calculation by The Business Times showed that its net profit would have to skyrocket to S$353.1 million. This implies a 58.2 per cent increase every year for the next four years, assuming its equity remains stable at the present level.

 

If equity goes up, then the earnings for Sats to reach an ROE of 15 per cent would have to rise in tandem and be even higher than S$353.1 million.

 

DBS expects Sats&rsquo net profit to be about S$285 million for FY2026. OCBC has an estimate of S$176.2 million for the bottom line. CGS International estimates Sats&rsquo net profit to be around S$291.6 million for FY2027.

 

UOBKH projects Sats&rsquo ROE to come in at 11 per cent for FY2028. 

 

When ROE covers the cost of equity, shareholder value is created otherwise, shareholder value gets eroded. With higher net profit, however, investors would expect Sats to reward them with a higher absolute dividend payout.

 

S$10 billion market cap

Sats&rsquo aspiration for market capitalisation of S$10 billion translates to a target share price of S$6.71, based on the current number of ordinary shares.

 

The counter closed S$2.93 on Tuesday (Jun 11), compared to the price of around S$4 before the WFS acquisition was announced, and a rights issue was undertaken to fund the S$1.8 billion purchase.

 

It would be pertinent at this point to look at the performance of WFS in its first year of integration with Sats.

 

The cargo handler generated a top line of S$2.9 billion. Sats alone contributed S$2.2 billion.

 

From the information Sats provided to support the WFS purchase in 2023, WFS&rsquo pro forma revenue for the 12 months to March 2022 was S$2.4 billion its aggregated pro forma revenue was S$3.6 billion after adjusting for financial reporting standards.

 

This means WFS revenue improvement was S$500 million over the two years from March 2022 to March 2024, while Sats posted a top line increase of S$1 billion during the period. 

 

Thus, while the enlarged group derived over half of FY2024 revenue from WFS, two-thirds of the uplift of S$1.5 billion in the group&rsquo s total revenue from FY2022 to FY2024 was actually from Sats.

 

But WFS accounted for the lion&rsquo s share of the group&rsquo s total earnings before interest and tax (Ebit), at about 70 per cent.

 

Meanwhile, the group said acquiring WFS has so far enabled it to realise S$40 million of the expected recurring annual S$100 million in Ebitda (earnings before interest, tax, depreciation and amortisation) stemming from network benefits as well as commercial, operational and financial synergies.

 

As for cargo handled, WFS reported 7.1 million tonnes for 2021 before it was acquired, and Sats had envisaged that they would together log 10 million tonnes in FY2025. 

 

But they collectively handled 7.8 million tonnes for FY2024, with 2.4 million tonnes by Sats alone, and only 5.4 million tonnes by WFS &ndash even lower than its 2021 tonnage.

 

Clearly, Sats&rsquo transformation journey has only just started. But it will be exciting to continue to watch and see whether the synergy from the WFS acquisition will help Sats fulfil its aspirations.

DBS and OCBC continue to rate the stock at &ldquo buy&rdquo

 

DBS Group Research and OCBC Investment Research have lifted their target prices for Sats : S58 +1.06% after the in-flight caterer and ground handler last week posted a jump of more than 10 times in profit for the half-year ended Mar 31.

 

Both research houses continue to rate the stock at &ldquo buy&rdquo .

 

On Tuesday (Jun 4), DBS raised its price target on Sats to S$3.60 from S$3.40 after rolling forward its valuation peg to FY2025.

 

Its analyst Jason Sum highlighted the stock for its &ldquo attractive&rdquo risk-to-reward setup with a projected 25 to 30 per cent upside from its current share price level. 

 

While the group&rsquo s fourth-quarter results beat expectations, Sum noted that DBS&rsquo FY2025 to FY2026 earnings estimates remained intact as the research house was already anticipating &ldquo considerable growth&rdquo in Sats&rsquo earnings over the next two years.

 

Its dividend-per-share estimates were also slashed to S$0.03 from S$0.06 for FY2025 and S$0.05 from S$0.09 for FY2026 to assume a lower dividend payout ratio.

 

Sats&rsquo resumption of dividends was nonetheless a positive surprise, said Sum, who added that the move signalled its management&rsquo s optimism about the group&rsquo s prospects. 

 

Though DBS raised its revenue estimates in the near term to reflect pricing improvement and stronger segmental volume growth, Sum cautioned that this would be offset by higher finance costs and tax expenses.

 

The analyst however foresees &ldquo meaningful interest savings&rdquo in view of Sats&rsquo recent completion of its refinancing of debt from its acquisition of Worldwide Flight Services (WFS).

 

In his view, Sats&rsquo WFS acquisition could start yielding operational and financial synergies over the next few years.

 

&ldquo 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 added Sum. 

 

Last Friday, OCBC revised its fair value estimate on Sats up to S$3.31 from S$3.09 while noting that the group&rsquo s FY2024 bottom line was a &ldquo strong beat&rdquo . 

 

Its analyst Ada Lim said that the group&rsquo s top-line growth would likely be driven by more commercial wins for its gateway services segment, along with further market penetration for its food solutions business given its increased production capacity.

 

Lim said she remained &ldquo constructive&rdquo on Sats&rsquo outlook.

 

Continued strength in global air travel demand would bode well for the group&rsquo s gateway services segment even as its pace of recovery begins to moderate, she added.