SATS: Result sucks; I’m sad for SATS
SATS's FY23 results were disappointing, with a PATMI loss of S$26.5m, much to my surprise after seeing SIA result. Revenue was in line with the travel recovery but the company is still struggling with elevated costs, and the China recovery is not yet materializing. FY23 PATMI loss of S$26.5m would have been a loss of S$77.6m excluding Covid related government relief.
Where is the operating leverage?
SATS had previously said that the costs of ramping up operations, such as re-staffing and retraining, would start to level off in late 2022. However, this does not seem to be the case anymore and the bottom line is very disappointing. Despite modest revenue growth of 0.5%, SATS’s staff cost increased by 9.1% q-oq- and the company is still ramping up staffing across new operations such as central kitchens in India, China, and Thailand, excluding consolidation of staff from WFS. This means that operating cost will keep going up while revenue outlook is bleak. Sad to say, SATS has zero operating leverage.
Cargo is also weak
SATS’s cargo volumes have declined q-o-q for four consecutive quarters. According to SATS management, there is an anticipation of reduced cargo volume in the near future, due to persistently high inventory levels, the delayed recovery of the Chinese market, and the potential occurrence of a US recession and a slowdown in Europe during the second half of 2023. Do note that SATS’s so-called strategic investment, WFS, primarily operates in the US and Europe.
WFS will be another pain point
SATS will likely incur a one-time expense of S$35.7 million due to the early redemption of two tranches of WFS's medium-term notes. This redemption is being conducted at a premium of over 3% on a combined value of approximately S$1.0 billion (equivalent to €340 million and US$400 million). The upfront costs associated with this redemption are expected to push SATS back into a state of net losses during the first quarter of FY3/24. Not to mention higher execution risk with WFS when its integrated.
Conclusion
I don’t have any position in this company, but I wanted to see how SATS performed vis-à-vis SIA. Alas, both the result and outlook is horrible. If you want to invest based on the travel recovery story, SATS is not a good choice.
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The stock is trading in a trading range, but the RSI and MACD are both bullish.
SATS LTD is a well-positioned company with a bright future.