My Corona Portfolio (3): SATS

Singapore’s economy wasn’t spared devastation brought on by the virus crisis, especially the travel and tourism, and hospitality sectors.  At one point in time, Singapore had the largest number of victims outside of China.  Both businesses and people have been riled by this health crisis.  I began to look at some battered stocks to see if I could fit them into my corona portfolio.

I looked at the following:

1. Hospitality REITS such as Ascott, Far East, Frasers

2. SIA

3. SATS

4. Straco

5. Transport Counters: Comfort Delgro & SBS Transit

Hospitality REITS looked very attractive.  But I’ve never really liked hospitality REITS because they are just too cyclical.  Besides, none of these SG-listed REITs has shown any consistent DPU growth over the years.  Well, I’m not ruling out buying these counters given their current valuations, but they rank low in my buy-priority.  

SIA has also not been one of my stock favourites.  SIA has no economic moat, in my opinion.  There is just too much competition within the airline industry. 

What about Straco?  As much as I’m not a big fan of hospitality REITs, I’m also not enthusiastic about tourism operators.  Aquariums and giant observation wheels sound boring to me, a 4.5% dividend yield not withstanding.

I already own Comfort Delgro and I might average down on it.

That left me with SATS and SBS Transit, both of which I like.  

SBS share has been on a decline since the beginning of the year.  I will be comfortable buying it below $3.  It still has a bit more way to go before reaching my target price.

I settled finally on SATS as the 3rd stock purchase of Feb 2020.

Introduction

SATS provides gateway services (ground and cargo handling, security etc) and food solutions (inflight and institutional catering to non-aviation sectors). SATS has operations in 60 locations in 13 countries, and employs 17,700 employees worldwide.

Highlights

SATS has inked a new 5-year commitment with SIA to strengthen Changi’s competitiveness with the renewal of a suite of aviation services contracts.  Tapping into the resources of data analytics, SATS  seeks to improve service and personalisation in F&B offerings.

SATS’s subsidiary in Japan is building a new in-flight kitchen with double the capacity in preparation for the 2020 Tokyo Olympics. 

SATS has entered into 2 new joint ventures (valued at RMB136 million) at Beijing’s brand new Daxing International Airport which opened late 2019, aimed at providing ground and cargo handling, and inflight catering.

SATS’s subsidiary in India, AISATS coolport (which occupies a 11,000 sqm facility) is the country’s first integrated on-airport perishable cargo handling centre located at Kempegowda International Airport.  This humongous facility was built to meet the extensive handling requirements of high-value perishable cargo products (such as pharmaceuticals) and end-to-end cold chain solutions.

Results and Ratios

In the latest annual report, SATS reported the following:

1. Revenue gained from Food Solutions increased from S$946.6 million (2018) to S$988.2 million (2019), registering an increase of 4.4%.  This ended a continual fall in revenue from food solutions since 2013.

2. Revenue gained from Gateway Services grew by 7.9% year-on-year from S$776.5 million (2018) to S$837.7 million (2019).  This segment has been growing year after year since 2010!

3. Revenue gained from Rental and other services grew from S$1.4 million (2018) to S$2 million (2019).  This source is a very small revenue stream for SATS.

4. Group revenue was S$1828 million (2019), up S$103.4 million or 6% from S$1724.6 million (2018) in spite of a challenging operating climate.  

5. Net profit (PATMI: Profit after tax and minority interests) fell 5% from S$261.5 million (2018) to S$248.4 million (2019).  SATS’s net profit margin has remained stagnant and even compressed for several years in spite of growth in group revenue. Expenditure (labour cost, raw materials costs, licence fees, etc) has been rising even as gross revenue grows.*

6. Productivity (value added per employee cost) suffers a 2.5% reduction year-on-year.**

7. ROE for year 2019 was 15.1 (ROE at/above 15 is good).  However SATS’s ROE is on a downward trend since 2017 (ROE:16.7).

8. Debt/equity ratio remained healthy at 0.06 times. That SATS could maintain its ROE while having little debt is really no mean feat. This means SATS has been running a superior business, and that speaks to the competency of SATS’s management team.

9. Free cash flow generated was S$208.1 million (up S$61.8 million from S$146.3 million in 2018).

10. DPU was on the 6th year of increase, up 1 cent to 19 cents (2019).  Current dividend yield is 4.7%.

11. PB ratio was 3.12 when I made my purchase.  Based on the recent share price of S$4.02, the PB ratio is 2.78.  

12. PE ratio is now 18.14 which is above its market average of 12.9 (and also above its average PE of around 16).

Why did I buy SATS?

First, SATS is set to grow its business.

If one were to take a casual look at the growth rate in SAT’s group revenue (S$1.75 billion in 2015 to S$1.83 billion in 2019), it is not difficult to notice that growth has been slow and thereby conclude that SATS may be a mature business.  

Maybe so, but is there still room to grow the business?  Apparently, there is, according to the management.

There will be growth in SATS operation in Singapore, in at least 2 areas.

In anticipation of higher visitor arrival in the future, a new passenger Terminal 5 is being developed at Changi International Airport.  T5 is said to be larger than T1, 2 and 3 put together, and is expected to open around 2030.  SATS stands to benefit big time from this development.

In addition, Singapore is also on a growth path to expand the Marina Bay cruise terminal, again in anticipation of higher visitor arrival by sea.  Singapore is the biggest cruise hub in South-east Asia, and SATS owns 60% of Marina Bay Cruise Centre that operates the cruise business.  The cruise terminal is going high-tech, leveraging technology – data science, video analytics and predictive artificial intelligence – to enhance its operations.  Again, SATS stands to benefit from this development.

There will also be growth in SATS operation in the region.

SATS has set a target of investing S$1 billion in either mergers & acquisitions or greenfield/brownfield capital expenditures to increase its Asia Pacific aviation presence in catering and air cargo market in the next three years.  SATS has already invested almost S$300 million in M&A and close to S$200 million in capital expenditures in the past five years. This S$1 billion invested is expected to generate incremental profits amounting to a quarter of its 2019 net profit of S$248 million.

SATS has the ambition to become the world’s leading central kitchen supplier for its aviation counterparts … and I like this company that is gunning for growth very much.

Second, SATS is in a defensive business.

As mentioned earlier, SATS has a dominant market presence, operating in 60 locations across 13 countries in Asia, Australasia, and the Middle East.  This massive network (comprising also of subsidiaries, joint ventures and strategic alliances) in many key airports has kept SATS’s competitors at bay.  SATS enjoys an entrenched market position.

Third, SATS is set on addressing its productivity issue (see* and ** above) in order to lower operating cost and boost net profit.

SATS intends to invest in a digital integrated supply chain across the region to reduce costs in production and limit food waste, and improve food security and sustainability.  SATS is working with Tum Create, a research platform for the improvement of Singapore’s public transportation systems, to develop what could possibly be the world’s first AI powered robotic air cargo system.  This system is named SpeedCargo will enable SATS to connect data for end-to-end optimisation of cargo operations.

This endeavour to digitise air cargo handling and transform otherwise laborious processes in the airfreight industry will see SATS benefit from improved productivity, time savings, and higher throughput and load factors.

SATS growth plans, for now, have been sidelined by the coronavirus crisis.

The reduction in regional travel as a result of the coronavirus will no doubt impact SATS’s earnings in the short term.  Wuhan is still in lockdown.  No one really dares to travel to China or Japan or South Korea.  The suspension of casino operations for 15 days in Macau has seen the usual flood of tourists reduced to a mere trickle.  For as long as the virus outbreak persists, SATS remains in a dark place operationally and financially.

Well, with regard to the virus situation, SATS has this to say,

“The COVID-19 epidemic has caused a significant reduction in air traffic in China, with a sharp decline in passenger and cargo volumes across Asia. Depending on the duration of this epidemic, there will be a consequential impact on the short-term financial performance of SATS. We are taking proactive steps to mitigate the risks and impact of the situation. Safety is our first priority at SATS, hence we have implemented plans to protect members of the public and our staff from the virus. We are working closely with the relevant authorities, suppliers and customers in each country we operate in, to support a coordinated and effective response. The company is in a strong position to weather the disruption to our business with resilience. 

Ongoing investments in supply chain processes and systems will provide greater traceability that will further strengthen our ability to respond to contingencies across our network. Recent investments in overseas kitchens in Japan and China, along with ground handling investments in India, Malaysia and Saudi Arabia have enhanced our capabilities, strengthened our market position and diversified our revenue base.” 

Until the virus situation is eradicated and regional travel outlook improves, SATS’s stock will remain impaired regardless of its fundamentals.

Based on PB, SATS is not exactly cheap. I’m looking for capital gain upon price recovery. And while I wait for that, there are dividends to collect.

I bought some SATS at S$4.49 on Feb 12 but within a matter of just 2 weeks, the share price dropped to S$4.03 (28 Feb).  A 10% drop! Well, shocking as it may be, I’m not exactly fretting over it.  Given the current situation, it was to be expected.

All that is needed now is for me to have the patience to ride this crisis out. And if I have more cash, I might average down (below S$4.00).

Incidentally, SATS’s stock code is S58.  The number 58 sounds like 唔發 in Cantonese, which means “won’t prosper/won’t huat”.  LOL.  It’s a good thing I’m not superstitious in any way.

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.