Heavy windfalls: SATS to continue contracting by 4.5%

It’s another quarter of disappointing earnings.

A weak air cargo business and escalating costs especially in labour are dampening SATS’s near-term earnings, despite stable aviation statistics at Changi Airport with SATS gaining a larger slice of the air cargo market.

According to a report by Maybank Kim Eng, the air cargo business may be strong in cash generation but the market will increasingly look to price SATS on earnings as it struggles to contain escalating costs in the near term.

The report reveals that SATS placed weak performance this year, underlying net income of $43.4M, down 9.4% from last year despite a 14.6% YoY reduction in depreciation charge arising from an accounting charge.

Here’s more from Maybank Kim Eng:

EBITDA margin continued to slide as SATS struggled to contain rising staff costs (c.50% of operating costs) amid a stagnating sales environment. Despite efforts to reduce headcount in the quarter, staff costs continued to trend higher by 3.0% YoY, suggesting upward wage pressure. While productivity initiatives to reduce labour dependency are underway, we expect the measures to only bear results at a later stage. Meanwhile, profitability will continue to be dampened in the year ahead.

Weak air freight market explains the poor performance at associates. Contribution from its associates fell short of expectations with earnings contracting by 16.8% YoY, dragged down by a persistent weakness in the air cargo market. Management singled out poor performances at its Hong Kong and Indonesia air cargo associates as key sources of weakness. The poor performance was particularly disappointing as we had expected better profitability with the recently acquired stake at PT CAS.