SATS: FY25 core earnings broadly in line with our expectations; lowered earnings estimates and TP to reflect trade tensions
- FY25 net profit excluding one offs was in line with our estimate and slightly above consensus
- Cargo saw some relief with US tariff suspension, but demand remains fragile and likely to weigh on FY26F
- Reduce FY26F/FY27F net profit by 14%/8% due to trade contraction and limited opportunities for trade diversion
- Maintain BUY with lower TP of SGD3.50
FY25 performance vs DBS/consensus
Source: Bloomberg, DBS |
4QFY25 core net profit met expectations. SATS reported headline net profit of SGD243.8mn, tracking consensus/DBS estimates of SGD243mn/SGD250mn respectively. This included SGD7.9mn in one-off impairment charges on associates/JVs, partially offset by c.SGD2.2mn FX gain. Adjusting for these, FY25 headline net profit would have reached SGD249.5mn (+332% y/y), meeting DBS’ and beating the street’s. Meanwhile, full-year core net profit of c.SGD261mn was in line.
Top-line slightly above expectations. Full-year revenue rose 13.0% y/y to SGD5.8bn, topping DBS and consensus estimates by 2.1% and 2.9% respectively. The beat was largely driven by a strong showing in cargo, with volumes up 11.0% y/y and yields rising 4.9% y/y amid demand frontloading as firms sought to avoid tariff hikes. Ground handling revenue was flat y/y despite a 5.8% y/y rise in flights handled, as revenue per flight was distorted by last year’s spike in volumes tied to major events (e.g. Taylor Swift and Coldplay concerts). The food solutions segment posted strong revenue growth of 11.4% y/y in 4QFY25, supported by a 9.3% y/y increase in aviation meal volumes and an 11.8% y/y rise in aviation food ASPs.
Segmental performance was mixed. At the group level, operating profit rose 22.0% y/y to SGD108.3mn (aided by SGD15.7mn in gains at the corporate level from writeback of expenses due to overbudgeting) but declined 14.9% q/q due to seasonality. Segment-wise, food solutions EBIT rose 25.7% y/y to SGD27.4mn amid a 94bps expansion in margins due to positive operating leverage. This helped offset weakness in gateway services, where EBIT dropped 24.8% y/y to SGD65.2mn due to margin compression (4QFY25: 5.7%, 4QFY24: 8.3%), owing to the high base in APAC last year (concert-related spike) and under-utilisation of new cargo terminals at JFK and Schiphol.
Other updates.
- Share of associates and JV profit declined 30.7% y/y, mainly due to staff bonus provisions at high-performing business units.
- 4QFY25 free cash flow (post-leases) rose 51.6% y/y to SGD179.6mn, bringing FY25 FCF to SGD228.3mn, a substantial improvement from the SGD48.2mn outflow in FY2.
- Final dividend per share (DPS) of 3.5Scts was declared, bringing full-year DPS to 5.0SCts (31% payout ratio, 1.7% dividend yield), meeting expectations.
- SATS has appointed Timothy Tang as Group CFO, succeeding Manfred Seah who will transition to Special Advisor in July 2025, as part of its leadership renewal; Timothy brings global leadership experience from DFS Group and the Jardine Matheson Group, with a strong track record in finance, M&A integration, and operational transformation.
Cargo saw some reprieve after the 90-day pause and temporary truce between China and the US. Management highlighted that cargo throughput continued to rise y/y in April, despite an uncertain tariff backdrop, supported by ongoing front-loading activity and a shift in transport modes, with more goods such as auto parts and components now being shipped by air instead of sea. Although the group experienced widespread cancellations of e-commerce charters from China to the US following the removal of De Minimis exemptions, it has since seen flight reinstatements after the 90-day truce between the two countries and expects a more meaningful rebound in e-commerce related volumes over the coming months.
However, visibility into 2HCY2025 is limited. The key concerns are whether current frontloading may cannibalise demand later in the year, as well as broader risks of overall trade contraction given limitations to trade diversion. The WTO projects global trade volume to decline by 0.2% in 2025, with a downside scenario of 1.5% contraction if retaliatory tariffs are implemented, compared to 2.9% growth in 2024. Given that global trade held up fairly well in 1QCY2025, the decline is likely to become more apparent from here.
Nonetheless, SATS’s extensive cargo network and adaptive routing capabilities should underpin continued market share gains, even as global trade flows remain volatile. SATS continues to outpace the broader market in cargo, with tonnage up 11.0% y/y in 1QCY2025 versus industry growth of 2.5%, and expects further share gains as it ramps up capacity at JFK and Schiphol while securing new commercial contracts. Notably, the group has already exceeded its five-year WFS integration synergy target within two years, achieving over SGD100mn in EBITDA synergies to date. On the cost front, the group retains flexibility to adjust workforce hours and cut discretionary spending if required, while ongoing deleveraging efforts should reduce debt by SGD100 to 200mn annually and reduce finance costs.
Updates to forecasts. We introduce two scenarios to reflect tariff risks. Our base case assumes the US imposes a flat 10% tariff globally and a 25% tariff on China. The bear case assumes a ‘Liberation Day’ scenario, with tariffs on China rising to 54%. Importantly, SATS’s exposure in North America to China-linked flows is modest, accounting for only 15% of North America revenue and around 5% of total group revenue, which can be partly mitigated by growth in ex-US trade lanes.
Our revised base case now factors in lower cargo volume growth and weaker gateway services segmental margins due to negative operating leverage. This results in 14% and 8% earnings cuts to FY26F and FY27F core net profit respectively, implying a 5-10% decline in FY26F, followed by a healthy rebound in FY27F with a two-year CAGR of 9%. In our bear case, which also factors in some drag on the aviation catering and ground handling businesses, core net profit could decline 20–25% y/y in FY26F before rebounding 30–35% y/y in FY27F, resulting in a more modest two-year CAGR of 2%.
Base and bear case key assumptions
Source: Company, DBS |
However, it is important to emphasise that our forecasts still assume resilient performance in SATS’s aviation catering and ground handling segments. This assumption will be tested if there is a meaningful downturn in air travel, whether due to broader macroeconomic weakness or an eventual recession. Trade tensions could escalate more sharply than anticipated, particularly given the current climate of policy unpredictability. Notably, Trump has recently threatened to impose tariffs on the European Union, citing dissatisfaction with the bloc’s negotiation progress, highlighting the potential for rapid deterioration in trade conditions beyond our current base case.
Maintain BUY but with a lower TP of SGD3.50. We revised our valuation methodology, reverting to a blended forward P/E and DCF approach instead of forward EV/EBITDA and DCF, as SATS’s core net profit has largely normalised relative to pre-pandemic levels. Our revised TP of SGD3.50 is derived by assigning equal weight to a 19.0x forward FY26F EPS valuation, which is 1.0SD below its five-year pre-COVID average, and our DCF-based valuation of SGD4.0.
Despite the downward earnings revisions, we continue to see a decent risk-reward profile. The stock is currently trading at just 18-19x forward P/E, or around 1.0SD below its five-year pre-pandemic trading range, suggesting much of the risk may already be priced in. While US trade policy has been highly disruptive, we believe Trump’s endgame is to renegotiate rather than dismantle existing trade arrangements. We continue to expect a material recovery from FY27F, once trade tensions ease, and see room for a re-rating on the back of more constructive trade headlines. Admittedly, FY26F will be a tough year for SATS, but we view it as a transitory and believe investors should focus on the more normalised earnings profile expected in FY27F.
Valuation table
Valuation Methodology | Parameters | Price per share (SGD) |
DCF | 7.2% WACC, 3.0% risk-free rate | 3.89 |
P/E | 19.0x FY26F EPS | 3.10 |
Average | 3.50 | |
Source: DBS
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