SATS: Negatives baked in, long-term potential intact
- 3QFY25 results slightly below expectations due to one-off performance bonus
- WFS integration exceeds expectations, with 92% of 5-year synergy goal realised
- Cut FY25F core EPS estimate by 3%, and FY26/27F by c.13%, reflecting trade disruptions
- Maintain BUY but with a lower TP of SGD4.0
Slight miss in 3QFY25; dimmer near-term outlook but long-term narrative remains sound
3QFY25 core PATMI of SGD70.4mn was slightly below expectations primarily due to a c.SGD7.3mn performance bonus provision, reflecting the group’s outperformance against internal targets. Excluding this charge, earnings would have been largely in line with forecasts. Group EBIT soared by 52.6% y/y to SGD127.3mn, with EBIT margin expanding 2.2ppts y/y to 8.4%, aided by broad-based margin expansion across Food Solutions and WFS, although SATS Gateway margins eased slightly on heightened seasonal staff costs and bonus provisions. Excluding the bonus provision, 3QFY25 group EBIT margin would have been 9.2%, though SATS booked a SGD5.1mn FX gain in the quarter, partially boosting its performance.
Healthy cargo and aviation food volume growth, alongside pricing gains in the food division. Group revenue grew by 12.5% y/y to SGD1,523mn in 3QFY25:
- Aviation food: +21.7% y/y to SGD235.0mn
- Meals produced: +20.7% y/y
- Implied ASP: +0.8% y/y
- Non-aviation food: +19.9% y/y to SGD121.7mn
- Meals produced: -5.8% y/y, largely due to the closure of its Kunshan facility
- Implied ASP: +27.2% y/y, driven by a positive revenue mix
- Cargo handling: +15.3% y/y to SGD771.4mn
- Tonnage – Group: +14.9% y/y, SATS: +10.8% y/y, WFS: +16.8% y/y, with the group benefitting from companies front-running tariffs.
- Blended cargo yield: +0.4% y/y
- Ground handling: +1.2% y/y to SGD395.2mn
- Flights handled – Group: +6.8% y/y, SATS: +13.6% y/y, WFS: +0.1% y/y
- Blended ground handling yield: -5.3% y/y
Significant turnaround in free cash flows to underpin deleveraging. 9MFY25 free cash flow of SGD48.8mn swung from a net outflow of -SGD166.7mn in the prior year, underscoring SATS’ operational turnaround and higher profitability. Management reiterated their goal of paring down debt by SGD200mn in the near-term.
We trimmed FY25F earnings by 3% and cut FY26-27F earnings by c.13%. Our negative revisions largely reflect the following:
- Imminent elimination of US De Minimis tax exemption: While the Biden administration had already sought to make changes to reform the De Minimis rule in response to a surge in low-value shipments from Chinese e-commerce platforms, their approach was more measured and consultative. However, the Trump administration’s approach has been far more rapid and comprehensive.
Initially, we had anticipated a reduction in the De Minimis threshold coupled with additional compliance measures to enhance transparency and enforcement, so the complete removal of the tax exemption took us by surprise. While Chinese e-commerce goods could still be cheaper after duties than buying from retailers in the US, delays in receiving goods could diminish their allure. Although the Trump administration temporarily reversed its decision, and management is hopeful implementation challenges will persist, we believe those challenges will likely be resolved over the next one to two quarters.
Around 20% of SATS’ total cargo volumes consists of e-commerce, rising to the mid-20% range for its US business. Hence, the De Minimis repeal will likely reduce its air cargo volumes in FY26F, especially as the boost from customers front-running tariffs are likely to subside over the coming quarters. However, we expect this to be partly mitigated by the diversion of trade flows as e-Commerce vendors relocate to tax-exempt countries like Malaysia, Thailand and Vietnam. - Trade tensions, and potential easing of shipping disruptions are set to dampen air cargo demand: Since returning to office, Trump has imposed several tariffs, including (1) a 10% tariff on all imports from China, (2) a 25% tariff on nearly all imports from Mexico and Canada (currently paused for a month), and (3) a 25% tariff on steel imports and an increased 25% tariff on aluminum (up from 10%). Although uncertainties remain about the ultimate scope and magnitude, particularly the possibility of reciprocal tariffs or VATs on US exports, these developments will undoubtedly impact global trade and air cargo demand. Additionally, with the Middle East situation stabilising, air freight, which had benefited from a shift of freight from sea to air due to shipping disruptions, may see traffic return to sea-based transport. We expect this shift to occur from 2HFY26F onward, as shipping schedules will need time to adjust, and ports could face congestion when a sudden influx of vessels arrives.
- Negative operating leverage and less favourable revenue mix (less high-margin e-Commerce volumes) will likely also lead to margin pressures in the group’s cargo handling business in FY26F.
Additional WFS synergies and interest savings should help blunt the impact of cargo headwinds. We are encouraged by SATS’ successful integration of WFS, which appears on track to exceed its original 5-year EBITDA synergy goal in under three years, and current momentum suggests considerable potential for more commercial wins by leveraging its extensive network. For instance, SATS and WFS recently clinched 14 new contracts with Air India in a global tender spanning multiple airports across three regions. Despite a higher interest rate environment, management is still targeting an additional 50–100 bps reduction in debt costs in the near term, following debt repayment and refinancing.
Lower TP to SGD 4.00, but negatives appear priced in. We lower our TP to SGD 4.00, reflecting our downward earnings revisions and a reduced valuation peg (8.0x forward EV/EBITDA vs 8.3x previously) given a higher degree of near-term earnings risk. The stock has corrected by nearly 20% since its peak in late 2024 and now trades at approximately 7.4x forward EV/EBITDA, a steep discount to its post-WFS acquisition average of 9.3x. While near-term sentiment may remain subdued due to negative trade-related headlines, we still see a credible path to solid long-term earnings growth once market conditions stabilise.
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