SATS (SATS SP) – Navigating Challenges with Resilience and Growth Potential

SATS (SATS SP) – Navigating Challenges with Resilience and Growth Potential

3QFY25: Results A Slight Miss; Expect Some Uncertainties For Cargo In FY26

SATS’ 3QFY25 financial performance was slightly below expectations, with 3QFY25 normalised net profit of S$73.3 million largely flat quarter-on-quarter, while a sequential growth was anticipated. This shortfall was primarily attributed to weaker-than-expected profit from the food solutions segment. A seasonally weaker 4QFY25 is expected.

3Q/9MFY25 Results Overview:

• Revenue Growth: 3QFY25 revenue rose by 12.5% year-on-year to S$1,523.3 million, driven by:
  • Food Solutions: Up 21.1% year-on-year to S$356.7 million.
  • Gateway Services: Up 10.1% year-on-year to S$1,166.5 million.
• EBIT Growth: Operating profit increased by 52.6% year-on-year to S$127.3 million. Notable contributions from:
  • Food Solutions: S$28.5 million, although down 30.5% quarter-on-quarter.
  • Gateway Services: Up 63.4% year-on-year to S$112.6 million.
• Net Profit: Reported net profit grew by 123.5% year-on-year to S$70.4 million, while core net profit increased by 105.3% year-on-year to S$65.3 million.

FY26 Outlook:

1. Food Solutions Segment:

   • Expected to continue recovering and growing as regional air travel picks up.
   • Growth initiatives in the non-aviation food space are anticipated to drive further gains.

2. Cargo Business Challenges:

   • Potential changes in the US de minimis tax exemption rule pose uncertainties, as the US air cargo handling contributes about 25% of SATS’ group revenue.
   • Revenue impact could be up to 2%, with EBIT potentially seeing a high single-digit percentage impact due to operational leverage.
   • Earnings forecasts have been adjusted to reflect these potential negative impacts, leading to an expected flat core earnings performance in FY26 compared to FY25.

3. Management Confidence:

   • Despite geopolitical uncertainties and a volatile cargo outlook, management remains confident in SATS’ resilience, supported by its strong scale and operational efficiencies.

Earnings Revision/Risks:

• Trimming FY25-27 Core Earnings Estimate by 2-3%:
  Adjustments made to revenue and cost projections due to 3QFY25 earnings miss.

• Key Risks:

  • Escalation of US-China trade tensions.
  • Potential shift of air cargo to ocean transportation due to the normalization of the Red Sea situation.

Valuation/Recommendation:

• Maintain BUY with a revised target price of S$3.86.
  • Based on 18.4x FY27F PE, which is 0.5 standard deviations below SATS’ historical mean PE of 19.9x.
  • The valuation adjustment accounts for SATS’ net debt position compared to its pre-pandemic net cash position.
  • Near-term sentiment may be subdued by negative news regarding US tariffs and de minimis tax rule changes, but long-term growth potential remains appealing.

SATS’ quarterly core earnings and revenue trends reflect a mixed outlook with growth in food solutions but uncertainties in cargo. Investors may stay invested for long-term growth potential despite short-term challenges.

Key Takeaway:
SATS is navigating a challenging environment with a balanced approach, leveraging growth opportunities in food solutions while mitigating risks in the cargo segment. Investors should consider both the risks and growth potential in the medium to long term.

Thank you