DBS upgrades Sats to 'buy', citing 'attractive' valuation

Sats has made commendable progress in refinancing WFS’s costly debt

DBS Group Research's Jason Sum has upgraded his call on Sats from "hold" to "buy", on the premise that the company's share price, which has dropped following the rights issue to fund the acquisition of WFS, is now at a level that gives an attractive risk-reward ratio.

In his May 19 note, Sum describes Sats, led by president and CEO Kerry Mok (picture) as a globally diversified aviation services and food solutions provider. It is not merely one of the world's largest ground handler, but also a "prominent" player in Asia's food solutions sector, serving not just airlines but also other big customers ranging from hotels to restaurants.

Sum warns that Sats might see a slow down in the growth of Sats' cargo business in the near term because of a slowing economy.

However, its ground handling and in-flight catering businesses will be benefitting from the global recovery in air travel, as will its non-travel related food businesses, thanks to a wider product range and higher production capacity.

"The acquisition of WFS should also start yielding operational and financial synergies over the next few years," writes Sum, who expects Sats' earnings per share to reach 19.7 cents in the coming FY2025 ending March 2025, up 88% from the pre-pandemic FY2019.

Sum says that Sats has made commendable progress in refinancing WFS’s costly debt, with meaningful interest savings expected to materialise from FY2025.

More importantly, the market will be paying attention on the assimilation of WFS, and whether the group can achieve its intended operating synergies within its projected timeline, thereby justifying the hefty price tag on WFS.

If so, that means more reasons for a re-rating of the stock.

Sum's current target price is $3.40, versus $4.30 when he had a sell call.

The new target price is based on both a forward EV/EBITDA multiple (previously forward P/E), and a discount cash flow valuation, as EV/EBITDA is a more relevant metric for ground and cargo handling companies, notes Sum.

For the analyst, key risks include macroeconomic instability that could delay the normalisation of air passenger traffic or negatively impact air cargo volumes.

In addition, there are potential execution risks associated with integrating WFS and achieving the anticipated synergies.

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