Yes, SATS does have a very strong economic moat — near monopoly in many airports globally. One of the surer ways is to assess its historical sales and earnings. Since its listing in 2000, SATS’s sales and earnings have shown resilience (with minor volatility) regardless of economic cycles. Of course, that doesn’t mean past success is an indication of future success.
One of the main challenges with SATS is that it is terribly difficult for them to pass on their continuous rising costs to consumers. Airlines, one of SATS biggest clients, have extremely thin margins and are extremely sensitive to any price adjustments.
I am re-visiting SATS at the moment as their price crosses $4.10. The last time I check them out was a few months ago when the price was $3.90 from dividend machine point of view, but dividend yield is not good enough. I was looking at 5%. I did not consider their growth. Now that I have the time to dig a little deeper, if their expansion plan goes well, the growth will be quite good I think. But I am very concern as the P/E is so high although may not be necessarily high when compared to similar companies. My considerations:
- Cash rich with very little debt.
- Very very strong moat. Effectively a duopoly in Changi with Dnata. Swissport tried to get some business, they cannot fight the economy of scale. Years later ASIG came in and got kicked out only after a few months.
- I also find the big players with economy of scale tend to be privatized due to its profitability (good sign?) – Swissport, ASIG, Dnata, WSF
- P/E currently is around 20-21 (it was around 18.5 a few months ago). EPS CAGR is 6.3% for the past 5 years. Therefore the PEG is around 3.33 (this is beyond high).
- I did a quick trailing P/E comparison with others
- BBA Aviation – parent company of ASIG. P/E around 25+. The problem is this company does MRO business (33% of 2014 revenue).
- Dnata – the big guy. I cannot find P/E ratio despite they share the financial statement (not sure why). Net profit margin has dropped from 14% in FY11/12 to 9.9% in FY15/16 (SATS has increased from 9.5% to 13%). However, the Dnata has upperhand on the ROE (20.7% vs 15%)
- Cara Operations Limited – handles airlines catering but also operates restaurants. P/E 13
- I decided not to go beyond 5 years because in 2011, SATS divested the food distribution business (if I am not wrong) called Daniel group in UK. They tried to replace this with TFK Japan, but I felt that it wasn’t very stellar until they won the Delta business in Oct/Nov 2015.
- I think the price is highly affected by
- Changi T4 that is coming up online next year and the news is that they have won the Air Asia (will move to T4) business from Dnata.
- The joint venture with Wilmar to supply good safe quality food to Chinese market. They have started looking for a location to build their central kitchen and this will be coming up online in approximately 2-year time. I think the impact will not be significant at the beginning.
- Changi T5 – this is way down the road
- Food distribution joint venture with BRF SA (this company is huge man).
- Acquisition of Brahim’s Holdings which has a strong foothold in KL and Penang airport. From my work, I get to know that Malaysia (KL) and Thailand (Bangkok & Phuket) are currently the most popular honeymoon / holiday destination for middle eastern. So this move is quite smart in a way they make use the shaky business of MH.
- Number of passengers passing through Changi airport has recovered well in the last 4 months of 2016. Baring any unforeseen circumstances, I expect it will surpass 2015 easily.
- The duty free joint venture
- The revenue has been decreasing for the past 4 years (again only 4 years so that the revenue contribution from Daniels Group does not distort the view), although the net profit has been increasing steadily.
- The previous year, the revenue was affected due to the loss of Jetstar to ASIG, although they have successfully get the customer back.
- The last financial year, the revenue dropped due to transfer of food distribution business to a joint venture formed with BRF SA
- Management is prudent
- cost of staff increase is proportional to the value added increase.
- implementing automation / machinery assistant in the view of tight labor in Singapore.
- keep focusing on their core value
I am worried that this stock will become another Raffles Medical. PE is high but expectation is high and it continues to deliver so unless there is a huge financial crisis (do you know when the next will come?) it is very hard to beat the price.
What do you think?
This is a very good analysis of yours and you are pretty clear on the strong moat for SATS. You also elegantly detailed down the potential growth drivers for SATS. Very good research! If I may add… SATS, in fact, has been facing challenges from low cost carrier (LCC) airlines which the travellers tend to save on food catering but Alex Hungate seems to be able to automate processes and helping SATS to save on the cost, thus higher margin although revenue didn’t grow significantly. This is something you might want to take note too. I am also equally bullish on T4 and T5 and at this stage, however, Singapore would need to recover from its recent slump.. Otherwise all these vision remains as ‘vision yet to be executed’.
On big players with the scale tend to get privatised – this is unknown and in my opinion, considered it as a bonus but don’t invest because of this reason. It’s considered speculative. On valuation aspect, I am very resistant with current share price. I would expect it to come down before I will be interested in SATS. When will the share price come down? Your guess will be as good as mine.
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