While the rest of the SGX-listed companies huffed and puffed their way through 2016, SATS was flying high. The share price of this blue chip darling even stormed to a record high of $5.11 in September 2016, setting a gold standard among fellow STI players. Amid the sluggish SGX market performance, it seems very strange that its stock has been so bullish. Just what did the management do that set the company apart from the rest?
The key reason for SATS’ strong performance might be due to its investment moats in two niches – Gateway Services and Food Solutions. Their Gateway Services encompass airfreight handling, passenger services, ramp handling, baggage handling, aviation security services, aircraft interior and exterior cleaning as well as cruise centre management. Food Solutions include airline catering, institutional and remote catering, aviation laundry as well as food distribution and logistics.
Being a dominant player in provision of gateway services and food supplies, SATS derived most of its revenue from the aviation sector. For 1H16/17, revenue of $752.4 million came from aviation sector, while only $110 million of revenue were derived from non-aviation and corporate.
SATS has many associates, joint ventures and subsidiaries but they contributed only $23.7 million profit in 1H16/17. Among them are Singapore Food Industries (SFI) which provides food services to the Singapore Armed Forces and SATS-Creuers Cruise Services which provides gateway services for cruise terminals through . However, AISATS, AAT, BAIK, MIC and PT JAS contributed approximately 75% of their share of after-tax profits from associates and joint ventures.
One reason for SATS massive ran up in stock price could be also due to its strong balance sheet and free cash flow. The debt-to-equity ration was healthy at 0.08 times while cash and short-term deposits stood at $452.7 million. The free cash flow generated year-to-date amounted to $68.1 million, allowing the company to fund acquisitions for growth purposes.
For example on 27 December 2016, SATS acquired 10% of the shares of Evergreen Sky Catering Corporation from Malaysia Airlines Berhad for $32.3 million. The deal is thought to be in line with the company’s growth strategy of scaling the food business.
In 2nd quarter FY16/17 results, Net Asset Value (NAV) was $1.36 per share while Net Current Asset Value Per Share (NCAVPS) amounted to $0.23. In my view, the current share price of SATS is inflated. Given that much of its business is focused in the aviation sector, the revenue and growth are sensitive to economic outlook as well. In fact, during the Great Financial Crisis in 2009, its shares were trading at the $1.00 level.
Notwithstanding the above, report card for 1HFY16/17 performance was excellent with revenue of $862.7 million, up 2.8%. Operating profit increased 14.4% to $118.1 million while underlying net profit surged by 10.1% to $117.6 million. On the back of such strong performance, SATS will likely to continue its bullish trend.
2017 will be an exciting year for SATS because the opening of Changi Airport’s Terminal 4 will mean increased business volume. Thus, SATS Inflight Catering Centre 2 is being expanded to handle larger batch sizes. In addition, the company is spreading its wings in the Middle East region through its cargo projects in Dammam and Oman.
Since listed in 1999, management has been rewarding shareholders with dividend payouts every year. The ordinary dividend payouts for the past 10 years had been minimum 10 cents, with additional special dividends being given out in a few years. Because of this, I would think that SATS is a good dividend stock to hold.
Not vested in this counter but will continue to monitor the company’s performance.
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