SATS Ltd: Reaching new heights with achievable ambitious
- Healthy volume growth with pricing gains in food division
- Negative free cash flow due to timing issues; not a cause for concern
What’s New
2QFY25 beat expectations; Capital Markets Day update
2QFY25 earnings above expectations due to margin beat. 2QFY25 core net profit grew 20.6% q/q and 315% y/y to SGD69.7mn, with 1HFY25 core net profit of SGD127.5mn accounting for 53%/51% of DBS/consensus’ full-year estimate. The group’s strong performance during the period was driven by a sharp increase in its operating profits (+12.7% q/q, +98.4% y/y), underpinned by strengthening operating margins (EBIT margin – 2QFY25: 8.8%, 2QFY24: 5.0%, 1QFY25: 8.2%) and healthy top-line growth. While the quarter included a double-counting of the rate increase in its contract with SIA (the rate increase from the contract renewal was not captured in 1QFY25, so the group reflected it in the current quarter instead, as retrospective adjustments were not possible), the group’s performance was still impressive considering they incurred SGD21.6mn in unrealised FX translation losses in the second quarter, which should have more than negated the one-off gain.
Healthy volume growth with pricing gains in food division. Group revenue grew by 5.9% q/q and 14.1% y/y to SGD1,451mn in 2QFY25:
- Aviation food: +32.1% y/y to SGD238.3mn
- Meals produced: +25.7% y/y
- Implied ASP: +5.1% y/y
- Non-aviation food: +20.1% y/y to SGD114.5mn
- Meals produced: +1.8% y/y
- Implied ASP: +18.0% y/y
- Cargo handling: +14.4% y/y to SGD710mn
- Tonnage – Group: +16.1% y/y, SATS: +14.7% y/y, WFS: +16.7% y/y
- Blended cargo yield: -1.4% y/y
- Ground handling: +3.7% y/y to SGD387.8mn
- Flights handled – Group: +5.0% y/y, SATS: +7.5% y/y, WFS: +2.4% y/y
- Blended ground handling yield: -1.2% y/y
Negative free cash flow due to timing issues; not a cause for concern. The only blemish in an otherwise outstanding result was the group’s negative free cash flow of SGD106.0mn the quarter, largely attributable to a significant build-up in working capital. We were pleasantly surprised by the interim dividend of 1.5Scts per share, and management expressed confidence in a considerable rebound in free cash flows in the subsequent quarters.
SATS also hosted a Capital Markets Day and provided a meaningful update on its medium-term goals for FY29F, with the following key highlights:
- Top-line: Revenue is expected to reach SGD6.6bn in FY27F and SGD8.0bn in FY29F, up from SGD5.1bn in FY24, representing a three-year CAGR of 9.0% and a five-year CAGR of 9.4%, with cargo/ground/food contributing 45-50%/25-30%/25% of revenue, respectively, in FY29F.
- Operating margin: EBITDA margin is projected to reach 19.5% in FY27F and 20.8% in FY29F, up from 15.5% in FY24, and >10% EBIT margin by FY29F.
- Financial leverage: Gross debt-to-equity ratio and gross debt-to-EBITDA (excluding share of profits from JVs. and associates) of c.1.1x and <3.5x, respectively.
- Return on capital and free cash flow: >15.0% ROE in FY29F, up from 2.4% in FY24, pointing to net income of SGD525mn in FY29F (48% 5-year CAGR). Total capex (including bolt-on M&As) will be 5% of revenue from FY25 to FY29, with 70% allocated to gateway services and 30% to food solutions. Free cash flow after leases (assuming capex equal to 5.0% of revenue) is expected to exceed SGD350mn in FY29F, up from -SGD48mn in FY24.
Gateway revenue to increase to SGD6.6bn in FY27F and SGD8.0bn in FY29F, up from SGD4.0bn in FY24, representing a three-year CAGR of 7.0% and a five-year CAGR of 8.4%, with segmental EBITDA margin reaching 21% and 22% in FY27F and FY29F, respectively, up from 18% in FY24. The group’s strategy for this segment largely involves the following:
- Network expansion and fortification of existing positions: SATS + WFS already hold a commanding position in Asia, Europe, and North America but have a limited presence in South America, the Middle East, and Oceania. The group will target opportunities in these regions and continue to invest in Asia, especially India and China, given the region’s expected growth outpacing other areas. Network expansion is crucial as global airlines grow and improve connectivity, as they will prefer working with a single partner capable of providing consistent support across multiple nodes. SATS has already leveraged its enlarged network with WFS to secure various commercial wins.
- Product and service innovation to reach additional customer segments: Beyond traditional cargo handling for airlines and freighters, SATS is developing value-added solutions for other segments, such as freight forwarders, e-commerce players, and ocean liners, including multi-modal and tailor-made services. For example, SATS can provide services like unstuffing, sorting, relabelling, and pallet building at its on-site airfreight terminal, streamlining the process and saving time and costs for freight forwarders.
- Using Singapore as an innovation hub: Leveraging the supportive ecosystem at Changi Airport, management intends to drive innovation and productivity improvements that are scalable across SATS’s cargo network. In a labour-intensive field like ground handling, automation will be key to efficiency gains, alongside tools to improve staff scheduling, operations planning, and coordination with other stakeholders.
Food revenue expected to reach SGD1.7bn in FY27F and SGD2.0bn in FY29F, up from SGD1.1bn in FY24, representing a three-year CAGR of 15.6% and a five-year CAGR of 12.7%, with segmental EBITDA margin rising to approximately 15% and 17% in FY27F and FY29F, respectively, up from 7% in FY24. Key growth drivers in this segment include:
- A relatively untapped fresh frozen meals (FFM) market in Asia: Unlike Europe and North America, where FFM accounts for over 90% of economy meals, FFM penetration in Asia is around 20%. Blind taste tests have shown minimal difference between FFMs and foods prepared through traditional methods. The benefits for airlines include:
- Cost savings, especially in key hubs where meals are still produced on-site.
- Reduced waste, as FFMs can last six months (and up to nine-ten months depending on ingredients), compared to cook-chill foods that must be disposed of if unused.
- SATS’s unique capability in producing quality Asian meals tailored to Asian consumers – the fastest-growing demographic in air travel.
SATS has most of the infrastructure in place (its Thailand facility is scaling up to 108,000 meals per day by 3QFY26 from 18,000 meals per day now) and would not need significant capex for on-site kitchens to serve export markets. Additionally, FFMs' long shelf-life allows SATS to serve airlines throughout Asia without needing catering licenses. EBITDA margins for FFMs are around 15-20%, with potential for further improvement as scale increases, which will be margin accretive.
- Non-aviation food: In August 2024, SATS launched a partnership with Mitsui, allowing it to tap into Mitsui’s sourcing, supply chain, and customer network to grow its non-aviation food business. For example, TFK has begun using Mitsui’s network to distribute products through retail channels like Kinokuniya and the East Japan Railway. The group is also exploring opportunities in adjacent sectors such as healthcare, sports hubs, and education.
Overall, we feel more constructive about SATS’s longer-term growth trajectory. We appreciate the insights provided by SATS and are more convinced by the roadmap they outlined to achieve their medium-term targets. Although the margin guidance of >10% in FY29F (compared to approximately 13% in FY16-19) may have disappointed some investors, given that SATS achieved an EBIT margin of 9.2% in 1HFY25 (excluding SGD20.6mn FX losses), we believe management’s conservative approach to guidance leaves room for potential upside. Low double-digit EBIT margins should be attainable, given the potential for considerable margin improvement at WFS (1HFY25 EBIT margin – SATS Heritage: 11.9%, WFS: 7.4%) as operational synergies are realised, with the sharing of best practices across the group, along with productivity initiatives driving operational excellence.
Furthermore, while SATS did not explicitly set a free cash flow target, we believe the group could achieve at least 80-90% free cash flow conversion (as a % of net income) by FY29F, supported by their asset-light strategy, implying potential free cash flow generation of at least SGD420-470mn. Additionally, we are glad that the group is comfortable with a higher financial leverage and is optimising its balance sheet (with a healthy target gearing ratio) and actively pursuing growth opportunities, rather than maintaining a substantial net cash position as it did pre-pandemic. This approach, supported by SATS's competitive debt cost (given implicit backing from Temasek), should lead to a more optimal cost of capital and catalyse earnings growth.
FY25/26F net profit estimates revised up by 13%/4%, introduce FY27F; maintain BUY with higher TP of SGD4.40. We lift our FY25F/FY26F net profit estimates by 13%/4% respectively to reflect stronger operating margins for the food segment and SATS Heritage, albeit slightly tempered by softer margins at WFS. We also introduce our FY27F estimates – while our revenue estimate is largely in-line (-1%) with guidance, our EBITDA estimate is 4% below as we adopt a more cautious stance on margins at WFS.
Management maintained a positive outlook on global air cargo growth, albeit at a slower pace heading into 2HFY25, driven by strong e-commerce demand and ongoing modal-switching resulting from Red Sea disruptions. Although the potential impact of Trump’s policies on global trade flows remains uncertain, the group’s extensive global network positions it advantageously to adapt swiftly to any changes. We increase our TP to SGD4.40 to factor our positive earnings revisions, and a lower (-50bps) cost of capital, reflecting the group’s long-term target gearing ratio.
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