• With its aviation business well on track for a recovery, SATS is proactively driving expansion in the non-aviation segment. We are positive on SATS’s decision to tap on its balance sheet strength and to propel growth through investment (M&As).

Benefitting From APAC Air Travel Recovery

• With its over 80% share of inflight catering and gateway services at Changi Airport and strong presence at regional hub airports in several key Asian countries, SATS (SGX:S58) will benefit directly from the air travel recovery in the region.
• We expect SATS’s travel-related businesses to return to pre-pandemic levels by FY25. This is in line with the International Air Transport Association’s air travel forecasts for APAC and SATS’s guidance, but excludes possible inorganic growth from M&As.

Expanding Non-aviation Segment, Another Engine of Growth

• We applaud SATS’s strategy to leverage its strengths and network in aviation and to diversify into the non-aviation segment (e.g. non-aviation food solutions such as central kitchens). This offers SATS another growth engine when its travel-related businesses remain in the recovery mode in the next 2-3 years.
• We project SATS’s non-travel segment to achieve a CAGR of 9.4% in FY22-25 (to contribute about 30% of group total revenue by FY25), driven by organic growth and recent investments in central kitchens in Thailand and India.

S$1b Investment Programme to Further Propel Growth

• SATS plans to invest about S$1b in a further 16-24% upside to our current FY25 (normalised year) net profit estimate of S$267m.

Near-term Cost Pressure Would be Eventually Passed Through

• Excluding government support, SATS is still in a net loss position, with a S$33m core net loss in 3QFY22. We expect near-term performance to remain weighed down by the rising cost pressure from:
  1. inflation on food ingredients and labour, and
  2. headcount build-up ahead of the business volume recovery.
• However, we expect the cost pressure to be eventually passed down to end customers as the businesses continue to recover.

SATS - Valuation & Recommendation

• Re-initiate coverage on SATS with P/E for FY25F stands at 0.8 standard deviation below its 5-year mean of 19.9x in a normal market.

• Calaysts: a faster-than-expected earnings recovery,
  • earnings-and value-accretive M&As, and
  • realisation of revenue or cost synergy from its regional network.
• Key risks:
  • any event that disrupts the air travel recovery, and
  • more challenging market conditions for its overseas ventures and investments.

Source: UOB Kay Hian Research - 28 Mar 2022