Is Sats worth S$4.50 a share?

• Sats Ltd (SGX: S58) share price rose to pre-pandemic levels this week
• The aviation ground handler’s stock is up nearly 14% so far this year
• UOB analysts on Friday (19 March 2021) gave the stock a boost, after lifting price targets to S$4.27 from S$4.07 previously
• Trade Sats shares with an IG account

Sats share price: what's the update?

Sats’ shares were up as much as 5% this week, thanks to positive economic recovery statements from the US central bank.

On Wednesday (17 March 2021), the US Federal Reserve reiterated its decision to maintain overnight borrowing rates at near zero through the year 2023. The Fed also improved its gross domestic product growth rate for 2021 to 6.5%, while keeping a tolerant stance on inflation.

The aviation services provider then saw its stocks hit a one-year high of S$4.58 a share the following morning, in line with the wider bull trend.

Share price has lowered slightly since to S$4.50 as at 14:00 SGT on Friday (19 March).

Year to date, Sats’ share price is up nearly 14%.

UOB raises Sats’ target price by 5%

UOB analyst K Ajith upped his target price on Sats to S$4.27 from S$4.07 previously in a new report published on Friday, while keeping a ‘hold’ rating.

His increased price estimate is based on the expectations for an easing on travel and border restrictions, and an earlier-than-expected air traffic recovery.

The analysts raised his net profit projections for the group’s FY2023 by 19% to account for slower wage growth and stronger associate earnings.

‘Operationally, we sense there would be significant operating leverage as flights resume, but a key uncertainty is the impact on margins from changes in inflight catering,’ said Ajith.

On the other hand, he cut his FY2022 earnings estimate by 27%, citing lower Jobs Support Scheme payouts.

Ajith also noted that Sats is currently trading at only 5% under its pre-pandemic share price, which implies that the market has already priced in recovery expectations.

‘Pre Covid-19 in 2019, SATS traded at an average of 25 times 2019's earnings, with multiples being justified due to its monopolistic status at Changi Airport. However, we believe such multiples might no longer be justified post Covid-19, due to the cyclical nature and volatility of the aviation industry," he added.

‘At our fair value, SATS would be trading at 20.2 times FY2023 earnings and 21 times pre Covid-19.’

Earnings expected to recover in March 2021 quarter

Meanwhile, CIMB reiterated an ‘add’ recommendation and S$4.30 target price in a 26 February report, on the expectation for an earnings recovery in the quarter ending March 2021.

The analysts noted that the contribution from Sats’ associates was ‘a positive surprise’, as they posted a profit of S$3.5 million versus the analysts’ expectations of a S$10 million loss in the group’s third quarter results.

CIMB also posited that Sats’ net cash of S$122 million will back its mergers and acquisitions (M&A) to ride the central-kitchen trend in China and India, as well as in air cargo.

UOB’s Ajith, on the other hand, chose to stay neutral with regards to the group’s M&As in light of its ‘uneven track record’.

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