SATS: Expansion Amid High Valuations

SATS (\$3.62, down 4 cents) has reported a significant development as Air India awarded cargo and ground handling contracts to SATS and its wholly-owned subsidiary Worldwide Flight Services (WFS). These contracts span across multiple major airports in Asia, Europe, the Middle East, and North America. Air India renewed 11 contracts and awarded 14 new ones through a global tendering process, significantly expanding its partnership with SATS and WFS. Key stations include Chicago, Washington Dulles, London Heathrow, London Gatwick, Birmingham, Frankfurt, Milan, Kuala Lumpur, and Hong Kong.

Bob Chi, CEO Gateway Services, APAC, at SATS, remarked, “We are honoured that Air India has chosen SATS and WFS for such a significant commitment. Our global network and exceptional service uniquely position us to provide unparalleled international coverage.” This sentiment was echoed by Ramesh Mamidala, Head of Cargo, Air India, who emphasized the importance of streamlining logistics processes and enhancing service levels for their ongoing transformation.

SATS currently has a market cap of S\$5.4 billion and is trading at 21x forward PE and 2.2x PB, with a dividend yield of 1%. The consensus target price stands at S\$4.38, representing a potential 20% upside from the current share price. However, despite the positive news, SATS’ valuations remain steep, and its share price has retraced 11.3% from its 52-week high. The report maintains a “HOLD” recommendation, citing lofty valuations that already factor in the positive developments. Future re-rating will depend on better-than-expected results and dividend deliveries.

Nam Lee Pressed Metals: A Turnaround Story

Nam Lee Pressed Metals (\$0.345, down 0.015) delivered a remarkable turnaround in FY2024, achieving a profit after tax of S\$12.2 million compared to a loss of S\$1.0 million in FY2023. This recovery highlights the company’s focus on financial prudence, operational efficiency, and business development. Net assets per share stood at 69.37 Singapore cents as of September 30, 2024, with a healthy cash position backed by prudent management.

The company saw revenue growth of S\$21.4 million, a 13.4% increase from S\$158.9 million in FY2023 to S\$180.3 million in FY2024. This was driven by additional orders for reefer container businesses, offset by lower construction revenue. Gross profit increased significantly from S\$14.8 million in FY2023 to S\$34.4 million in FY2024, with the gross profit margin rising from 9.3% to 19.1%. This improvement was attributed to higher revenue from the reefer container segment and a favorable shift to higher-margin construction products.

Property, plant, and equipment rose to S\$63.6 million as of September 30, 2024, driven by acquisitions. Inventories and trade receivables also increased, reflecting higher revenue. Contract assets grew to S\$14.5 million, while trade payables decreased due to the utilization of trust receipts to settle supplier invoices. Loans and borrowings rose to S\$30.6 million.

In terms of cash flow, net operating cash flows for FY2024 amounted to S\$1.1 million. However, investing activities resulted in a cash outflow of S\$5.6 million, primarily due to the construction of a new office building. Financing activities generated S\$8.2 million, driven by trust receipts and bank loan drawdowns.

Looking ahead, the company remains cautiously optimistic. Demand in the construction sector is expected to grow alongside strong housing needs, while the reefer container business is expected to remain stable. Challenges such as inflationary pressures and global economic uncertainties persist, but the company is well-positioned to navigate them. The Board has proposed a final dividend of 1.5 Singapore cents and a special dividend of 0.5 Singapore cents per share, subject to shareholder approval. At its last traded price, Nam Lee is capitalized at S\$84 million, trading at a trailing PE of 6.9x and price-to-book of 0.5x. With a payout ratio of 40% and a yield of just under 6%, the stock is highlighted as one to watch for its reasonable valuations and decent yield.

Macro Market News Affecting the US, Hong Kong, and China

Macro trends indicate a mixed picture for global markets. In China, the steel sector faces challenges as the country is set to miss its year-end target for boosting production using less-polluting electric-arc furnaces (EAFs). The property crisis continues to weigh heavily on steel demand, with home prices sagging amid a glut of unsold units. EAFs, which are less polluting compared to traditional coal-fired blast furnaces, contributed only 9.9% to China’s total steel production in 2023, far below the 15% target set for 2025. Analysts expect some progress in 2025 driven by decarbonization goals, but challenges remain due to sluggish sales and plunging prices in the construction steel segment.

In the US, consumption remains resilient in the lead-up to recessions, making it less relevant for forecasting economic downturns. GDP, being a lagging indicator, is deemed a poor predictor for financial markets. Trade policy under a potential second Trump presidency is flagged as a significant cyclical risk, with the possibility of tariffs on all Chinese imports raising the overall US import tariff rate to 10%. Such tariffs could have severe implications for economic growth, even if temporary, as large trade actions typically invite retaliation.

What’s Ahead: Dividend Announcements and Market Events

Several companies have announced dividends and special distributions. Notable mentions include:

• Frasers Property Ltd: Final dividend of 4.5 cents, payable on February 14.
• PNE Industries Ltd: Final dividend of 2 cents, payable on February 14.
• Thai Bev: Final dividend of THB 47 cents, payable on February 28.
• LHN Ltd: Final dividend of 1 cent, payable on February 21, and a special dividend of 1 cent, payable on May 30.

Key market events for January and February 2025 include earnings announcements from companies like Mapletree Logistics Trust, Ascendas REIT, UOB, and ComfortDelGro. Investors should stay tuned for updates on these companies as they release their results.