Top 7 Things You Need To Know About SATS Ltd Before Investing

SATS Ltd (SGX:S58 ) (S58 5.12 +0.03 +0.59%) is listed on the Singapore Exchange and is part of the 30 companies that make up the Straits Times Index (STI). It runs a monopolistic business for airport services and ground handling services in Singapore coupled with other businesses in its portfolio. These businesses include in-flight food and services, food products & distribution and catering services.

Other than the airline industry, SATS also serve the healthcare and hospitality sector, mostly through its food business.

In total, SATS has a presence in 14 countries covering 53 cities and 47 airports. It serviced 91 million passengers and 96 million meals in 2016.

With the boom in the aviation industry in Southeast Asia, will SATS benefit as well? Here are 7 things you need to know about SATS Limited.

Stock Information
1
TICKER SYMBOL: SGX:S58

MARKET CAP: S$5.7 Billion (30th May 2017)

INDUSTRY: Service Sector

The Business

SATS operates its business through two segments, food solution and gateway services. The businesses it runs within these two segments are illustrated below.

SATS Ltd Food and Gateway

Source: https://www.sats.com.sg/InvestorRelations/FinancialReporting/RoadShows1/Preso%20deck-1.pdf

Looking at the two segments, the distinction between them is very clear. One segment deals with all its food businesses. This business is involved not only in the airline sector but also in the hospitality and healthcare sector. Apart from that, SATS also does food distribution and logistics under which it carries a dozen or more brands. In this segment, SATS provides Iinen laundry services to both the airline and hospitality sectors. The food solutions segment contributed S$ 973 million in revenue for the company for the fiscal year 16/17, representing 56% of total revenue.

The gateway services business for SATS entails its ground handling services and premium lounges. If you are travelling from Singapore, you would unmistakably see SATS services in Changi Airport. Ground handling is an essential service (no one likes to lose their baggage do they!!) to ensure that passengers baggage is returned to them on the arrival at their destination. As for premium lounges, these are run for frequent flyers or passengers travelling in business and first class to ensure valuable experiences for them.

SATS is also involved in airfreight handling and logistics, this is done through the six airfreight terminals that it runs. And lastly, SATS is involved in cruise terminal management such as the marina bay cruise terminal where it ensures a pleasant and seamless experience for passengers travelling via the terminal. This segment contributed 44% of SATS total revenue in the fiscal year 16/17, coming in at S$750.8 million.

Overall, for the fiscal year 16/17 SATS had revenue of S$1.73 billion and profit came in at S$234.3 million. Over the last ten years, SATS has seen revenue grow at 6.18% per annum. Its profit has grown at 1.58% per annum over the same period.

Key Opportunities

Terminal 4 and 5

SATS Limited currently controls most of the gateway service market in Singapore. The opening of Terminal 4, which is expected around late this year (2017), will allow SATS to expand its essential services to more airlines. This could be done with its ground handling and lounge services as well. While Terminal 4 could provide a short-term boost to earnings for SATS, Terminal 5 might provide a major boost to earnings for SATS when it is ready in late 2020. This is because Terminal 5 is proposed to have a capacity of approximately 60% of terminals 1 to 4 combined. This means revenue and earnings for SATS could increase significantly if it wins the contract to service Terminal 5 as well.

Expansion into other regions and adjacent businesses

In 2016, SATS formed numerous joint ventures or acquired stakes in many companies located across Asia and the Middle East.  In Saudi Arabia, it won a tender to become the second cargo handler at the airport in Dammam. It also acquired a 49% stake in Brahims Airline Catering Holdings in Malaysia. It entered into an agreement in Taiwan with Evergreen Sky Catering Corporation and in Oman it entered into an agreement with Oman Air for cargo handling services. All these are new markets for SATS and it would allow the company to use the expertise it developed in its home market to grow across the region. With Asia and the Middle East growing, this gives SATS an early mover advantage positioning in these markets. That advantage might benefit the company in the years to come.

Other than the above mentioned, SATS also entered two new businesses in 2016. The first was with Yihai Kerry of China to provide safe and high-quality food. It’s unclear which sector of the market SATS aims to target for this service.

Also, SATS entered into a Joint venture with Duty-Free (Singapore) to compete in the fast-growing travel retail market. These two adjacent businesses allow SATS more diversification together with helping it enter new fast-growing markets.

Key Risks

Rise of Budget Airlines

The rise in the number of budget airlines and the number of passengers choosing to fly budget could be a double-edged sword for SATS. On one hand, it means that the company could potential have higher earnings from its ground handling services. However, this might not be true as well since a lot of passengers on budget airlines travel light and have only carryon luggage. Also with the rise of budget airlines, SATS airline food business might suffer as well. This is mainly because budget airlines do not provide complimentary meals on the plane which reduces the demand for SATS food solutions business.

Loss of Premium lounge services

Following on from above, the budget airline industry could potentially also disrupt SATS lounge services business. While it is still very common for large corporations to fly their executives in first or business class, many smaller businesses have started choosing budget airlines as an alternative to fly their staffs. If this trend should continue and larger corporations follow suit, SATS could see a drop in the requirement for its lounge services.

Valuation

SATS Limited currently trades at a Price to Earnings (PE) ratio of 22 and provides a 3.36% dividend yield for its investors. That is higher than its average valuation for the past 5 years, which is around 18.1 times its earnings, with a 3.7% dividend yield.

Investor Relations

Investor Relation Material:

For Investor Enquiries
Melissa Low
Melissa_lowym@sats.com.sg

Top Shareholders (2nd August 2016)

  1. Venezio Investments Pte. Ltd. 43.18%
  2. DBS Nominees (Private) Limited 12.46%
  3. Citibank Nominees Singapore Pte Ltd 11.33%

Financials

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ketz’s personal capacity and do not in any way represent those of his employer and other related entities. Ketz does not own any companies mentioned.

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