SATS: Watch Dividend Re-Initiation And Lengthy-Time period Targets (SPASF)

My score for SATS Ltd. (OTCPK:SPASF) [S58:SP] inventory is a Purchase. I’m inspired by the corporate’s resumption of dividend funds, and I’ve confidence in SATS’ potential to increase its income and enhance ROE within the years forward. As such, I’ve made the choice to revise my score for SATS from a Maintain to a Purchase.

The main target of the sooner July 16, 2020 write-up was the corporate’s “impairments and dividend suspension” in the course of the COVID-19 pandemic.

Within the present article, I write about SATS’ dividend re-initiation and the corporate’s monetary targets for the long term. SATS refers to itself as “the world’s largest supplier of air cargo dealing with providers and Asia’s pre-eminent supplier of meals options” in its media releases.

Traders must be conscious that SATS’ shares will be purchased or offered on the Singapore fairness market and the Over-The-Counter market. The buying and selling liquidity for SATS’ OTC shares is poor. However readers can deal in SATS’ liquid Singapore-listed shares (three-month common every day buying and selling worth of round $12 million as per S&P Capital IQ information) with US stockbrokers equivalent to Interactive Brokers.

Dividend Re-Initiation

I drew consideration to “the suspension of the corporate’s ultimate dividend for FY 2020” (YE March 31, 2020) in my mid-July 2020 replace. Since then, SATS has continued to omit dividend distributions for the FY 2021-2023 interval.

On the firm’s FY 2024 Annual Normal Assembly on July 19, SATS’ proposal to pay out a dividend per share of S$0.015 on August 8 was given the go-ahead by shareholders. The resumption of dividend funds for SATS has a number of positives.

Firstly, the dividend re-initiation marks SATS’ return to optimistic earnings.

The corporate recorded normalized losses for 3 consecutive years (source: S&P Capital IQ) between FY 2021 and FY 2023, because the COVID-19 pandemic disrupted air journey and damage demand for SPASF’s aviation-related providers. On its investor relations web page, SATS highlights that over 90% of its prime line is linked to the aviation business.

SATS rotated from a normalized web lack of -S$26.7 million in FY 2023 to register a optimistic normalized web revenue of +S$78.5 million for FY 2024 as revealed in its earnings presentation slides. Extra considerably, the re-initiation sends a sign that SATS is assured about sustaining optimistic earnings.

Secondly, the resumption of dividend distributions signifies that SPASF’s credit score dangers are manageable.

SATS’ web gearing or web debt-to-EBITDA ratio improved considerably from 6.4 instances as of March 31, 2023 to three.9 instances (source: earnings presentation) on the finish of March this yr. Trying forward, the corporate’s web gearing metric is prone to decline additional. SPASF famous on the firm’s 2024 Annual Normal Assembly that it’s concentrating on to pay down one other S$200 million of debt within the new fiscal yr or FY 2025. The present consensus end-FY 2025 web gearing forecast is for 3.2 instances, barely decrease than the present degree. (Per S&P Capital IQ information)

The corporate would not have probably thought-about re-initiating dividends, if it was apprehensive about its monetary leverage or the flexibility to pay curiosity. The credit score metrics offered above additionally suggest that SATS’ monetary place is enhancing.

Thirdly, SATS will be capable of get on the radar of a bigger group of institutional and particular person buyers.

Sure institutional buyers are certain by their funding mandates to focus solely on dividend paying shares. However, many particular person buyers are reliant on their inventory portfolios for normal dividend revenue. SATS would not be a possible funding candidate for these dividend-focused buyers prior to now couple of years when it suspended its dividend funds.

The FY 2024 dividend represents a modest +0.6% yield. However the consensus FY 2025, FY 2026, and FY 2027 dividend yields for SATS are 1.3%, 2.1%, and three.1%, respectively. As SATS’ monetary efficiency improves over time (the topic of the subsequent part), the corporate’s rising dividends will likely be more and more engaging for buyers.

Lengthy-Time period Monetary Targets

SPASF outlined its monetary targets for the long term as a part of its most up-to-date fiscal 2024 earnings presentation. In particular phrases, the corporate goals to ship a prime line of S$8 billion and a ROE of 15% in 2028.

SATS’ long-term monetary targets translate right into a ahead income CAGR of +9%. It additionally implies an enlargement in ROE to historic ranges previous to COVID-19 (its FY 2016-2019 ROEs had been within the 15%-16% vary).

The inventory is now buying and selling at a consensus ahead one-year normalized P/E a number of of 18 instances (source: S&P Capital IQ). As a comparability, SATS’ three-year imply ahead P/E ratio was 23 instances previous to the COVID-19 outbreak. In different phrases, SATS has a capital appreciation potential of roughly +28%, assuming a re-rating of its P/E a number of from 18 instances to 23 instances sooner or later.

My opinion is that the corporate’s long-term monetary targets regarding top-line development and ROE enchancment are sensible and achievable.

SPASF shared related information from Letsrotate (cargo market analysis agency) and Worldwide Air Transport Affiliation (IATA) in its FY 2024 outcomes presentation slides. Particularly, worldwide air visitors is projected to develop at a +7% CAGR for the 2023-2028 (calendar yr) timeframe, in response to IATA’s forecasts. Additionally, information from Letsrotate signifies that international demand for cargo providers has elevated by roughly +9% within the first 5 months of 2024. These numbers are fairly near the +9% CAGR implied by its S$8 billion income purpose. There may be extra development for SATS derived from inorganic sources like growing its fairness curiosity in related firms or executing on bite-sized M&A offers.

Individually, there are two key drivers of ROE enlargement for SATS going ahead.

Final yr, SATS concluded the takeover of “international air cargo logistics supplier Worldwide Flight Providers” or WFS as per its April 3, 2023 announcement. In its investor FAQs relating to this deal, SPASF emphasised that “the asset-light nature of the enterprise implies that the WFS Group has been capable of develop effectively with out incurring important capital expenditure.” This means that SATS’ general ROE has the potential to rise meaningfully sooner or later by scaling up the WFS enterprise.

However, SATS was much less environment friendly with its monetary administration prior to now. For the FY 2010-2019 interval, the corporate operated with a web money steadiness primarily based on S&P Capital IQ information. As talked about above, SATS’ web debt-to-EBITDA metric as of end-FY 2024 was 3.9 instances. Whereas substantial debt could be a key danger issue, the affordable use of monetary leverage will enhance an organization’s ROE. As SATS stays in a web debt place (versus web money prior to now), it will have a optimistic influence on its future ROE.

Key Dangers

Traders ought to watch sure danger elements regarding SATS carefully.

A possible omission of dividend distributions for FY 2025 and past will probably disappoint buyers, and lift doubts concerning the firm’s monetary well being.

If SATS’ subsequent quarterly outcomes miss the sell-side analysts’ expectations, it will decrease the market’s confidence in SPASF’s potential to attain its long-term monetary targets.

Conclusion

I’ve rated SATS as a Purchase now. My view is that the inventory is deserving of a extra demanding valuation a number of, contemplating its dividend re-initiation and the potential enchancment in its monetary efficiency.

Editor’s Word: This text discusses a number of securities that don’t commerce on a significant U.S. alternate. Please pay attention to the dangers related to these shares.