Expanding E-Commerce And Partnerships With Mitsui And Shun Feng Will Extend Global Reach

Key Takeaways

• Strategic partnerships and expansions in food services and e-commerce are expected to drive revenue growth and improve margins for SATS.
  
• Increased cargo volume and integration of innovative supply chain solutions are likely to enhance profitability and operational efficiency.
  
• Heavy debt levels and reliance on cargo growth pose risks to revenue and profitability amid competition and operational uncertainties.

Catalysts

An investment holding company, provides gateway services and food solutions in Singapore, Asia Pacific, the United States, Europe, Middle East, Africa, and internationally.

• SATS is benefiting from significant growth in cargo volume, driven by the increase in e-commerce shipments from Asia to Europe and the U.S. This operational catalyst is likely to enhance revenue growth as the company leverages its operating leverage to increase profitability.
  
• SATS is expanding its food service offerings, with a notable 27% increase in aviation meal volumes year-on-year. This expansion, coupled with growth in domestic markets like China, Japan, and Singapore, is expected to contribute to higher revenue and margin improvements.
  
• The strategic partnership with Mitsui aims to enhance channel access in Japan, leveraging Mitsui's network to increase utilization of SATS food factories in China, India, and Thailand. This initiative is expected to boost revenue and possibly improve net margins through expanded market reach and higher factory utilization.
  
• SATS is focusing on strategic partnerships in the e-commerce space, such as the MOU with Shun Feng, targeting expansion beyond Asia into Europe. This collaboration is projected to increase revenue and possibly enhance earnings due to more value-added services and expanded geographic reach.
  
• The integration of the Kuehne+Nagel collaboration, which combines ocean and air transport solutions, offers SATS an opportunity to provide alternative supply chain options. This innovation could lead to efficiency improvements, potentially increasing operating margins and overall earnings.

SATS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SATS's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 5.7% in 3 years time.
• Analysts expect earnings to reach SGD 354.1 million (and earnings per share of SGD 0.24) by about February 2028, up from SGD 199.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SGD405.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, down from 24.6x today. This future PE is lower than the current PE for the SG Infrastructure industry at 24.6x.
• Analysts expect the number of shares outstanding to decline by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.66%, as per the Simply Wall St company report.

SATS Future Earnings Per Share Growth

Risks

• The company's reliance on continued growth in cargo volumes, especially from e-commerce, posits risks if demand decreases, which could decrease revenue streams and impact net profit margins.
  
• Increased competition or unexpected challenges in strategic markets such as Japan, China, and India may hinder expansion plans, affecting revenue growth projections and impacting earnings negatively.
  
• Operational risks in new business ventures and partnerships, like those with Mitsui and Shun Feng, could pose challenges, potentially impacting projected financial synergies and cost savings.
  
• High current levels of debt, as evidenced by a total of $4 billion in debt, could strain financial resources and limit profitability if interest rates rise or cash flows falter.
  
• The uncertainty of cost savings and synergies realization from acquisitions, such as the target of $100 million synergy from the WFS acquisition, poses a risk of not reaching anticipated profit margins and earnings.

Valuation

• The analysts have a consensus price target of SGD4.28 for SATS based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD6.2 billion, earnings will come to SGD354.1 million, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of SGD3.29, the analyst price target of SGD4.28 is 23.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.