SATS soaring higher and higher

Less than 2 weeks ago, I wrote about SATS here and predicted that Q2 would be an excellent quarter. I'm happy to say I'm right =D

This dragon has soared to the skies!

Credit: SATS quarterly presentation slides

2Q EPS soared 28.5%.
1st Half 2015/16 EPS up 22.2%

SATS is on a productivity gain overdrive by focusing on automated processes and cutting down on manpower. This helped the company to achieve remarkable results.

SATS is somewhat like Sheng Siong

• Cost control measures helped boost their bottomline
• Low debt (no debt for Sheng Siong)
• Excellent free cash flow (gushing with cash!)

So, would I buy more of SATS with this set of goods result?

Its important to buy good businesses. Its equally important to buy good businesses at good prices with sufficient margin of buffer.

	May-15	Oct-15
Share price	$3.19	$3.98
Share price % change		25%
EPS % change		22%

Seems like the market has already fully priced in the set of good results. Unfortunately, this doesn't seem like sufficient buffer for me.

Dividend payout ratio

EPS 19.8 (annualised)

DPS 14.0 (assume same as last year)

Payout ratio 70.7%

FCF/share 15.7 (assume comparable with last year)

Payout ratio 89.1%

Dividend for this year, if remained the same, is still sustainable. 

One small concern though, is the declining revenue is somewhat affecting the free cash flow of SATS. SATS would need to find ways to improve its top line to boost its free cash flow.

Nonetheless, awesome quarter for SATS!

The little things that SATS do to entrench its presence

Just recently, SATS announced its intent to acquire BAC; a dominant caterer in Malaysia. In my Sleeping Dragon post, I mentioned that SATS has an excellent reach and market share in the industry. 

In-flight caterer/Ground Services - Market Share

(*New) Malaysia - 95% of In-flight catering
Singapore - 80%

Vietnam - 75%

Maldives - 70%

India - 67%

China - 60% 

Japan - 50% in Narita, 40% in Haneda

Hong Kong and Taiwan - 30%

Macau - 100% (only in-flight caterer)

With that, SATS further strengthened its footing in the region. BAC's major customers includes Malaysian Airlines, Air Asia and Cathay Pacific.

Risks
However, there's also risks to think of.
1. Currency risk
2. Malaysian Airlines ailing business
3. Malaysia's air traffic growth

However, I'm not overly concerned with those, bearing in mind that the profits of BAC would constitute less than 2% of SATS' total profits. The financial risks are immaterial.

What's important to me is that act of "capturing" new regions and being the market leader in them. The qualitative step is what interests me.

Q2 results peek!
Singapore's aviation data was released:

SATS' main profit drivers is the Food Solutions segment. 

Q1 saw the Meals produced increased by 2.5%. Q2's result doubled.
Q1's profits soared 14.5% despite a drop in revenue (due to cost savings).

I expect the cost savings to continue due to productivity gain, coupled with the excellent set of Food Solutions and Gateway services (Q1 registered a drop in Gateway), Q2 should be an excellent quarter for SATS.

Changi Airport & Xiamen's MOU has positive impact on this Company

Changi Airport Group (CAG) and Xiamen Airlines signed an MOU this month to embark on initiatives to grow passenger traffic between Singapore and China. 

Case in point, Xiamen (second tier city) is currently the fourth largest Chinese city for Changi Airport, just behind the key metros of Beijing, Shanghai and Guangzhou.

The airline has reportedly grown passenger traffic at Changi at a compounded rate of 9% since 2009. This together with the relaxed visa requirements for Chinese to visit Singapore will surely aid in driving up numbers from China.

Now the important question is, who provides Gateway services and Food solutions for Xiamen Airlines?

Yes, SATS. This sleeping dragon is really awake. They've reported their Q1 results and are as follows:
Revenue down 4.2% 
on weakening JPY, divestment of an Australian Subsi and the transfer of their food distribution business to their JV, SATS BRF Food formed earlier this year.
Profits up 14.5% 
due to excellent cost control. Staff cost, the largest component, was down $3.8m due to a 550 reduction in headcount. Cost of sales also reduced at a higher pace than revenue from better sourcing. Also, Share of Associates and JV rose 23% due to better contribution from both Gateway and Food solutions.
EPS up 15.4% 
Interim Dividend 9 cents (up 1 cent)

The mystery case of XD status
24 July (Friday) was SATS XD status. Technically, the price will fall by about 9 cent (from $3.69 to $3.60) due to XD. This happened early in the trading hours until about 1030am.

SATS closed at $3.80 instead, registering a 11 cent increase despite a 9 cent XD. This is either pure speculation or insider trading. Either way, their near term catalysts remains.

• Rebates offered by CAG
• Cost controls and productivity drive
• Increase in DPS for 2015
• Jetstar contract win
• Improvement in Japanese operation from Delta Airline win
• CAG & Xiamen Airlines MOU until 2018

Earlier, I predicted SATS Q1 results to come in 7-8% growth. I've to say a 14.5% growth was pleasant. Overall revenue fall for the group should recover with the recent contract wins and the easing of Visa requirements for Chinese to Singapore.

I'll remain vested =)

Predicting SATS' Q1 results from the operating metric!

Headline summary

Gateway Services flat

Food Solutions growth of 2-3%

Attempt to predict Q1 FY2015/16 results

Business segment proportion of revenue:

60% Food solutions

40% Gateway

Geographical proportion of revenue:

Singapore 82%

Japan 13%

Others 5%

Take a look at Q1 FY2014/15 aviation operating metric first.

Overall Singapore aviation operating metric last year was up about 1.5-2% (heavier on Food Solutions)

Overall Singapore revenue (actual) for the quarter was up 1.3%. **Food Solutions revenue dropped despite the growth in Singapore's metric was due to weakening Yen.

So, let's try to extrapolate this to Q1 FY2015/16 result, 

Singapore revenue to similarly grow about 2%

Food Solutions to remain flat.

WHY?

Although more meals were produced (2.5% YoY growth) in Singapore, the Japanese Yen has considerably weakened against the SGD from 2014 to 2015 (largely due to QE in Japan). This weakening of the Yen is expected to offset the moderate growth in Singapore's revenue.

The Bottomline?

I still expect EBITDA to growth around the 6-7% range (Q4 FY14/15 = 7.2%) mainly due to continued cost management effort. Will continue to add on price weakness, but it doesn't seem like the price will be weak anytime soon.

Disclaimer!

But of course, all these are mere guesses and me being bored. I have never proclaimed to be pro at earnings estimates. I'm just trying to have some wild guesses and also hone my analysis capabilities.

Cheers!

SATS and MERS?

Seems like I've been writing quite a few articles on SATS. Previously I last wrote an article about the minor catalyst for SATS - Jetstar. Now, I'm discussing another potential good news for SATS again.

MERS
MERS outbreak in South Korea has been widely reporting for the past few weeks. Although no official travel advisory has been issued by the Korean government nor WHO, we know that thus far the disease seems highly contagious. Whether or not the actual figure is higher than reported in anyone's guesses.

Impact
This recent news says "Travelers from China, Taiwan and Hong Kong cancelled more than 85 percent of the trips, the Korean Tourism Organization said"

I sincerely hope that MERS will stop spreading and the situation in Korea improves very soon.

Korea's largest tourist source country
No surprise, for April 2015, China takes up 46% of Korea's inbound tourists.

2014 first three quarters outbound Chinese tourists

Destinations	Number of Chinese Mainland Tourists
Hong Kong	5,370,884
South Korea	3,546,921
Thailand	2,884,539
Taiwan	2,671,350
Macau	2,434,431
Japan	1,394,203
Singapore	990,159
Malaysia	677,836
Indonesia	646,048

The trickle down effect

It is highly possible that the Chinese will divert their travel plans from Korea to South Asia.

Where does SATS fit in?

Remember what I shared in my previous post?

In-flight caterer/Ground Services - Market Share

Singapore - 80%

Vietnam - 75%

Maldives - 70%

India - 67%

China - 60% 

Japan - 50% in Narita, 40% in Haneda

Hong Kong and Taiwan - 30%

Macau - 100% (only in-flight caterer)

This is, however, all in theory. Still, it's something to think about.

Lastly, let's pray that MERS gets under control soon.

Minor catalyst for SATS (again)

Remember during October 2014 when this splashed the headline?

More than a thousand Jetstar passengers face delays, cancellations and luggage headache

I remember reading that article back then and realised the ground handler back then was ASIG, Jetstar's new ground handler. Being vested in SATS, I was secretly laughing at the airline for not using SATS (or rather, abandoning SATS for ASIG).

Shortly after, MOM got involved in this case for ASIG's alleged staff salary issue. Boy, things just ain't working out isn't it?

Now, you can probably guess where this is going....

According to UBS' report today, Jetstar is set to return to SATS for their ground handling services from 22 July 2015 onwards. 

Quote as follow:

Major implications for industry profitability
More importantly, this marks a return to the duopoly situation in the ground handling scene at Changi Airport, with SATS enjoying a c. 80% market share vs. 20% for dnata. We think such a structure will have positive implications for the broader industry profitability, especially for SATS, with less pricing pressure likely to benefit margins. Jetstar was the only contract that ASIG managed to secure, since it was awarded the third ground handling license in 2011. Swissport was the third ground handler at Changi from 2005 to 2009, and its staff count of 300 was similar to present day ASIG.
Nevertheless, Swissport exited the industry after four years citing "economic reasons", despite having four major airline customers. While ASIG's current plans remain unclear, we believe it likely that ASIG will similarly exit, given the significant difficulty for it to achieve relevant scale in Singapore, thus benefiting incumbent operators such as SATS.

Duopoly. I love monopoly/oligopoly or anything that suggests my investments are the leader of the pack.

Looks like this year is going to be a good year for SATS. Fingers cross and keep flying :)

SATS soaring to greater heights?

When people think of SATS, they think "Aviation". That's pretty such true to a large extent. From its incorporation in 1999 where Aviation took up 100% of its revenue, the sector still takes up 80% of the current revenue in 2015.

Air Traffic Outlook in the region
SATS recently published the presentation slides for dbAcess Asia Conference 2015 and I suggest fellow readers to take a look at it. In it, it presented the following chart:

The increase in Airport's Capacity is not without substantiated thought behind it. Boeing's report on Air traffic outlook depicts that Asia Pacific is project to grow at an annual rate of 6.3%, the highest amongst the other regions.

Singapore, being frequently voted as one of the best Airport in the world, will stand to gain from this boost in traffic growth. To make the image even rosier, let's not forget that SATS has a great presence in the Asia Pacific Airports as well.

The rise of the Middle East hub

Dubai, as we all know, is the rising Air Hub in the world, mainly due to its geographical location. What amazes me is how "80% of the population is within an 8 hour flight from the Middle East hubs".


A look through their annual report and I found that SATS had a presence in the Middle East via its Associates or JV holdings.


Chairman has also said that there're constantly looking to strengthen their presence in the Middle East and Asia. Let's hope this materialise.



Set your horizon far and SATS should do well

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham

 I'm intending to hold on to SATS for a long period of time and let the market does its weighing. Be patient and keep calm guys.

:)

SATS, the sleeping dragon, is awake

SATS announced its Q4 and full year results today. Boy oh boy, things are looking good.

Results Summary

Revenue declined by 1.9% amidst the challenging environment

Operating Profit increased 4.1% due to excellent cost control

Underlying profit increased 7% due to increased contributions from their JV/Associates.

These are really impressive numbers, considering that revenue has shrank and yet SATS managed to improve their profits year-on-year.

I reckon their coming quarters to yield better results due to the additional cost savings stemming from the reduction and rebates of aeronautical fees in Changi and their continued productivity drive.

Future Catalysts

Over the longer term, with the upcoming completion of T4 and T5, Changi should see a further increase in air traffic. SATS, having about 80% of Changi's market share would stand to benefit largely from Changi's growth as well.

Also note that SATS has a foot in Singapore SportsHub via its wholly owned Subsidiary SFI. Should the Government's vision of creating a vibrant sporting country come true, SATS would also stand to gain from this.

Increasing core dividends

Core dividends also increased from 13 cents to 14 cents. Note that SATS' core dividend has been steadily increasing. That's another encouraging sign for long term investors.

Market Leader

Lastly, what I love about SATS is its great reach and market share it holds in the industry.

In-flight caterer/Ground Services - Market Share

Singapore - 80%

Vietnam - 75%

Maldives - 70%

India - 67%

China - 60% 

Japan - 50% in Narita, 40% in Haneda

Hong Kong and Taiwan - 30%

Macau - 100% (only in-flight caterer)

A footing in the Cruise Industry

SATS also owns Marina Bay Cruise Centre and their average market share of the Cruise Segment is about 40%

Owns SFI (Singapore Food Industry)

If you've served the Army, you would know that SFI is one of the caterers for the Army's cookhouses. SFI is also used for events like YOG, NDP parades etc. How "safe" can this business be?

At the closing price of $3.21, that translate to a dividend yield of 4.36%. Yummy!

SATS, the hidden dragon, is awaken?

SATS' share price has been slowly creeping up.

It further creeped up when Changi Airport Group announced the rebates and reductions of the aeronautical fees at Changi. This is targeted at providing support for airlines and ground handlers, to boost Changi's competitiveness as an air hub.

This comes as air traffic through Singapore is still showing softness in the data. Changi registered a 0.9% drop in passenger during Q1 as compared to a year ago.

The introduction, and extension, of the reduced fees benefits SATS tremendously. Though the impact of the cost savings from these incentives would not be reflected in its next announcement, shareholders are expecting the results to show in the coming quarters. 

This, together with "productivity push" (which unfortunately has not been elaborated further), should see an improved bottom line for SATS.

Healthy balance sheet

I'm still keeping my stake at SATS. This hidden dragon may soon be awaken :)