Monday, 27 March 2017

WILL SATS SOAR WITH NEW TERMINAL AT CHANGI?



Shares of SATS Ltd have performed strongly during the past few years. Investors who bought shares of SATS five years ago and held them till today would have more than doubled their investment, when dividends are included. Recently, SATS has fallen by more than 10% from its all time high of $5.39 back in January. This correction seems to be a good opportunity to invest in a business with good growth potential.

Source: SATS Annual Report 2016

SATS' business can be split into two segments - Food Solutions and Gateway Services. Food solutions services includes airline catering, food distribution and logistics. The Gateway Services segment includes handling of baggage and cargo, airport security, aircraft cleaning and managing the Marina Bay Cruise Centre.


Upcoming Terminal 4 to increase number of flights



Changi Airport's Terminal 4 is expected to be completed by mid 2017, and has the capacity to handle an additional 16 million passengers yearly, increasing Changi Airport's maximum capacity to 85 million passengers per year. The increase in the number of flights would increase demand for in flight catering and airport logistics which SATS handles.  



Earnings per share driven by good cost management


Source: SATS Annual Report 2016

Though revenue has declined during the past five years, SATS' net profits continues to grow consistently. This can be attributed to SATS' productivity enhancement efforts through the use of technology, resulting in better cost management. Increasing productivity has improved SATS' return on equity to 15%. For 9M 16/17, SATS' revenue has increased by 1.8% year-on-year, possibly reversing the trend of falling revenue for FY 2017.


Opportunities for growth


Source: SATS Annual Report 2016

SATS has a geographical presence at 47 airports in 14 countries, located primarily in Asia and the Middle East. Despite this extensive geographical presence, revenue from Singapore still contributed to 81.5% of total revenue in FY 2016. Revenue from Japan was a distant second at 13%. SATS has noted that it intends to seek new opportunities beyond Singapore. With rising affluence in Asia, the increased spending power of the middle class would drive demand for air travel.

Conclusion


At a price of around 24 times earning, the market definitely expects SATS to continue to produce strong earnings growth. If SATS can continue to deliver higher net profits, we can seize the opportunity to invest in a good company during any market corrections.

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