Sunday, December 16, 2018

Market Talk- My Take on SATS

I thought I would use this weekend to think through about my investing plan for the week and for the month.

So to start off, buying a stock can be generally broken down into two segments: firstly which stock to buy and secondly when to buy that particular stock. I think the order does not really matter and can be based on your preference.

I am going to simplify my problem set for a start and look at STI stocks which are trading near their 52-week low as a starting point. (I am assuming undervalued stocks are near their 52-week lows, which may not be too bad an assumption) The below stocks would be the one which I have highlighted in my criteria. (<1% to its 52-week low) The last prices here are the closing prices of the stocks on Friday 14 December 2018.


Here I have 5 stocks of interest namely, Keppel Corp, SATS, Singtel, Venture and SPH. For today's post, let's delve into SATS since it's the nearest to its 52-week low.

Firstly, let's look at the different breakdowns of revenue.

Source: SATS 2nd Quarter Report 2018/2019

There are two business segments, namely food solutions and gateway services. 

Based on the SATS website, the food solutions business consists of 'airline catering, food distribution and logistics, industrial catering as well as chilled and frozen food manufacturing, besides linen and laundry services'. The gateway services tackles 'airfreight, baggage and ramp handling, passenger services, aviation security, cargo, warehousing, perishables handling to cruise handling and terminal management'. We can further analyze this in terms of the industry where SATS's revenue is heavily concentrated in the aviation industry. Lastly, in terms of geography, most of SATS's revenue is derived from its Singapore operations.

A superficial observation would be that SATS derives most of its income from airlines and the Singapore market. The airline industry has not been very rosy too, where higher oil prices have taken its toll in the industry. Airlines will then be forced to save up on costs, where SATS will continue to feel the pressure.

My first line of thought should be whether the demand for such services will continue to persist. The second line would be to determine the current level of competition in the market. I did a quick Google check and found out that the top competitor was dnata.

dnata is SATS' main competitor in both food solutions and gateway services in Singapore. There is already a history of competition between the duopoly which operates in Changi Airport. You can read more about it in this 2016 Today article here. Based on SATS website, SATS has a significantly higher market share of 80% of all scheduled flights at Changi Airport and serve 50 out of the 68 scheduled airlines in Singapore. This may allow SATS to withstand competition from existing competitors like dnata and any new entrants.

However, despite of all the risks I have highlighted above, it's quite consoling to observe that revenue has been mostly increasing across all segments (business/industry/geography) with some exceptions. Operating profit has also increased by 8% although Profit After Tax and Minority Interests (PATMI) had a substantial decline of 9% for the 2nd quarter, where Earnings Per Share (EPS) dropped from 6.5 to 5.9 Singapore cents. This decline was generally attributed in the report to 'lower contributions from both Gateway and Food associates/Joint Ventures'. These ventures are generally based in Malaysia and Indonesia and might continue to pull down on SATS due to lower volumes and/or currency depreciation against SGD.

One more thing that is of interest to me will be the history of dividends paid so far.

Source: dividends.sg


I like the fact that SATS have been generally increasing their dividend payouts over the years and averaging the higher end of 3-4% with a payout of 18 Singapore cents this year. 

So moving forward here, will I buy the stock? Currently, oil prices are plunging where airlines may be able to take advantage of these savings (if they are not too heavily hedged). These factors may allow SATS to enjoy higher revenue from these airlines. Another potential factor for upside would be an increase in international visitor arrivals in Singapore for 2019, which can also lead to an increase in volume of people taking flights. I must say these are double-edged swords, as the inverse will also be detrimental. 

The largest risk here would be the trade war between US and China, which might blow up and affect SATS especially in its gateway services (air cargo services) where they will suffer from a decrease in trade volumes due to tariffs. Passengers travelling on business class might also be affected as less trade might mean less flow of passengers for business.

In conclusion, in this uncertain economic climate, I am not sure if SATS will continue to outperform, but I am fairly confident that it can survive at least in the Singapore market in the long term as it does not face any strong competition in the market now. Personally, I would be looking to buy SATS around a price of 4.50 which yields a 4% that I am very comfortable with in the long term. I hope this has been enlightening to you as it has to me!


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