SATS profits could drop by up to 3% amidst weakening cargo volumes

That said, its food solutions division could ride on the 2020 Olympics.

SATS’ earnings could slip between 2-3% in 2019 due to a less optimistic operating margin outlook, thanks to weak cargo volumes and the consolidation of Ground Team Red (GTR) entities, a report by DBS Equity Research revealed.

The firm’s Q1 profits slipped 14.4% YoY from $63.9m to $54.7m led by flat core revenue and lower margins. “Operating profit was below our estimate at $56.8m, and contribution from associates/joint venture (JV) income was lower as well,” DBS analysts Alfie Yeo and Andy Sim noted.

Also read: SATS Q1 profits down 14.4% to $54.7m

The quarter saw a drop in cargo revenue (452,000 tonnes handled, -1.7% YoY), which was said to be in line with softening global economy and loss of flights from Jet Airways.

Operating margin was lower at 12.2% largely due to the lower cargo revenue which has high operating leverage or fixed costs. Its margins were also affected by the loss of nine flights a day from Jet Airways after the India-based airline suspended all of its flights including international sectors in April as it failed to raise fresh funds to continue operations.

Margins were further exacerbated by the consolidation of GTR, which has lower margins, the analysts said.

And although headline revenue grew 5.8% YoY to $465.1m, the analysts noted that it was largely due to the consolidation of GTR entities, Ground Team Red Holdings and Ground Team Red, which took effect from January.

“Stripping out the $22.5m contributed by GTW, core revenue would have been flat at $442m, up 0.6% YoY,” Yeo and Sim said. A separate report by CGS-CIMB also noted that excluding the effects of GTR, SATS’ Q1 gateway revenue remained flat YoY at $201m, despite the cumulative YoY decline in freight volume and flights handled.

“Associate/JV income fell by 4.6% YoY to $14.6m, partially affected by lower cargo volumes across some entities as well as Jet Airways’ suspension,” Yeo and Sim added.

Excluding India, which recorded provision of $3.3m relating to Jet Airways, associates/JV contribution would have grown by 17% YoY. China also saw start-up costs at Daxing Airport which is due to open in October, whilst the firm’s food associates remained flat.

That said, CGS-CIMB analyst Lim Siew Khee noted that in contrast to some market expectations of a decline in catering revenue as a result of a contract renewal with Singapore Airlines (SIA), revenue from Singapore food solutions stood firm YoY at $372m. She also noted that Japan TFK revenue grew approximately 8% YoY to $66m.

“We expect stronger growth in 2020, riding on the Olympics,” she said. This sentiment was echoed by OCBC Investment Research’s (OIR) analyst Chu Peng, who expects the growth in SATS’ food solutions to continue as Japan gears up for the upcoming Olympics, by doubling its capacity with a new in-flight kitchen to better serve Haneda and Narita International Airport.