Friday, July 19, 2019

SATS- Trap or Opportunity?

What caught my eye in the market was SATS, whose price took a great hit of 6% due to earnings dropping with a drop of 14.4% in net profit. However, the closing price of 5 on Friday was notably still higher than the 52-week low of 4.55. I previously wrote about SATS here a few months ago and many of the points I mentioned remain salient.



From my previous post:

'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.'

'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.'

Based on the UOB report here, main reasons for the drop in earnings include the grounding of Jet Airways, low volume of air cargo and the grounding of the Boeing 737 Max airplanes. I think the low volume of air cargo is an effect arising from the trade war but the first and third factors were pretty unexpected reasons in play.

EPS dropped from 5.7 cents to 4.9 cents but I think dividend payout should remain safe in the short term unless the three factors mentioned greatly exacerbate. At closing price of 5, dividend yield is 3.6%.

For me, the game plan is to enter below 52-week low of 4.55, perhaps at 4.5 levels for a 4% yield. If these factors snowball badly, a higher margin of safety is going in when the price hits 4. We will see if the trade war will still continue to persist or cease to exist.

2 comments:

  1. I bought some SATS shares at $5.01. Looking to accumulate at $4.50, similar to what you have in mind. :)

    ReplyDelete
    Replies
    1. yup 4.55 is the 52-week low and what i am looking to buy. i am probably not buying at current price for a higher margin of safety

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