Update: On 28 Sep 2022, SATS announced a proposed acquisition of Worldwide Flight Service.
Investors had driven SATS stock (SGX: S58) to 5-year lows as COVID-19 spread globally in the first quarter of 2020.
With Phase One of Singapore’s economic re-opening underway, the question on many (potential) investors’ minds is…
Is this in-flight catering darling still good to buy post-COVID?
Here are some thoughts.
Earnings Recovery May Be Longer Than Expected
While investors are getting optimistic about the looser circuit breaker restrictions in Singapore, note that the global aviation and travel industry is still hurting badly from the COVID-19 pandemic.
Most of the world is still not ready for leisure travel – and this includes Singapore, which as at 7 June 2020, has reported 383 new cases – of which 14 are within the community.
Although we’re certainly past peak cases in April, there is still a lot of uncertainty and fear about fully opening up our borders for fear of a “second wave” of infections – both from the government and from Singaporeans.
Most of SATS revenue (82% in FY19) is derived through Singapore’s Changi Airport and hence dependent on passenger volumes in and out of Singapore.
Not surprisingly, our monthly visitor arrivals have fallen over 90% relative to the previous year – and we should expect to see this reflected in the 4Q19 earnings (as well as FY20) in aviation-related revenues.
Alas, it’s hard to say when Phase 3 and beyond will kick in. The risk to SATS is that it may take longer than expected for the world to resume international travel.
Moreover, countries might impose certain limits on travel (ie. one seat apart or max flights per day), thus passenger volumes will certainly not be at pre-COVID levels for a while which may mean prolonged periods of weak earnings.
If you are holding (or going to hold) SATS based on the argument that the long-run value will be sustained, it may be wise to reconsider your game plan if earnings do not recover within your expected timeframe and current share price optimism dies off.
A Much Better Bet Than SIA
That being said, SATS is a much stronger business than Singapore Airlines (SGX:C6L) – which it counts as one of its key downstream customers.
SATS undeniably dominates food and gateway services for the aviation industry in Asia – having partnered and acquired smaller players in the region.
Looking at SATS’ liquidity, we see Current Ratios that are well over 1, which indicates that the company can comfortably pay its short-term debts or any owing to suppliers – even amidst weak performance from COVID-19.
Moreover, SATS increasing Cash Ratio tells us much of these short-term obligations can be easily covered by its Cash balances without extending into more debt.
However, we note that SATS recently raised $200m of fixed-rate notes due 2025 at the end of March and end of April. We believe this is more of a safety measure rather than a need to cover any arrears – and SATS reported that they will use these proceeds to “refinance existing borrowings and general corporate purposes”.
While SIA is wholly dependent on passenger volumes for revenue, SATS has carved out a non-aviation segment which contributed ~14% of revenues in FY2019.
The non-aviation segment mostly centers around providing food services to corporations, but includes other services like its Marina Bay Cruise Centre operations and corporate services.
With COVID-19, SATS has started to focus on growing this segment aggressively – and we likely see the non-aviation segment becoming a more significant part of overall revenues in the years ahead.
This is a good thing for SATS over the long-term as revenues become less cyclical and more predictable.
We like that SATS already has famous, growing brands as its customers – including HaiDiLao, Yum! China, Astons and Walt Disney Shanghai.
In fact, management has earmarked S$1b in CapEx over the next 3 years for such growth.
Investors should expect to see this growth coming from investments in China and India – with its last acquisition before the crisis in China’s food service chain Nanjing Weizhou.
So… Buy or Don’t Buy?
There’s no quick and easy answer to this question.
Before salivating at the low share price, ask yourself if you can stomach prolonged periods of uncertainty and depressing earnings numbers with SATS, even as rest of the industries start to re-open and collect itself from COVID-19.
If you can – (and not kid yourself when you really are speculating on a quick price rebound) – then I believe you already have the answer.
