With COVID-19 all but the past, it is still unbelievable that tourism stocks are still trading at their pandemic lows.
Even though Sats Ltd (SGX: S58) rode on the recovery tailwind, its share prices crashed down after the S$1.64B acquisition plan of Worldwide Flight Services became public.
It has since languished below S$ 3 per share since October 2022.
However, the recent set of results has reawakened the bulls, and SATS is up 11% as of the time of writing.
Is the worst finally over for this once SGX stock darling?
Why did share prices crash down the 2nd time?
For some companies, especially the tech and semiconductor industries, the pandemic-induced sell-offs were brief, before a strong rebound followed by rallies.
The others saw recovery only when borders and restaurants reopened back.
The remaining laggards, the tourism industry stocks, only saw a total recovery last or this year when they recorded results which surpassed pre-pandemic highs. This bolstered share prices as well.
SATS initially rebounded swiftly. However, the acquisition of Worldwide Flight Services (WFS) for nearly S$1.64 billion, funded by a mix of equity, and internal cash flows, on top of additional debt, significantly diluted the outstanding shares and weakened its balance sheet.
The significant dilution and massive gearing created a double whammy and sent SATS stock prices back down below S$ 3 per share.
Latest FY 24 results
With the amalgamation of SATS and WFS, surely the revenue of both combined units will show significantly higher when compared on a YoY basis.
Thankfully, there is a breakdown in the revenue segment, where we can observe SATS’ recovery and the contribution from WFS.
SATS’ core business continues to show improvement and growth versus each preceding quarter, while WFS’ first FY contribution has been stable.
However, long-time SATS investors and observers might lament the balance sheet isn’t as robust as it used to be. The WFS acquisition made SATS a bigger company, but it also came with a hefty debt package.
That is a price to pay, and many investors I come across still seem to be sceptical.
My Opinion
I know SATS used to be a Dividend Darling of the SGX. But under the new CEO Kerry Mok, it has decided to become a growth company for the time being by taking on the WFS acquisition, at a valuation that many deem expensive.
SATS’ operating cash flow is now higher with the acquisition of WFS. A higher operating cash flow gives it the capability to pare down its hefty debt, while also reinvesting back to grow its business.
Credits should also be given for its free cash flow margins, which went back to the black.
The ability to resume dividends assures that even though the company has taken on more risk and leverage, the new acquisition is showing signs of a payoff.
Growth in the upcoming quarters and fiscal years, would be crucial for the company to deliver its 3 Rs: Repay Loans, Reinvest in CaPex and Resume dividends.
It would be critical to judge SATS from the lens of a dividend play now but from a growth play. I’d say it’s fair game for the first FY, and I’m looking forward to the S$ 8 billion revenue goal by 2028.
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