Deep-dive 2020-4: SATS Ltd
SATS (SATS SP) is the main gateway services and airline catering provider at Singapore's Changi Airport.
The company was formed as the ground handling services operator at Paya Lebar Airport for Malayan Airways, and later for Singapore Airlines after the Singapore split from Malaysia. SATS was eventually de-merged from Singapore Airlines in 2009. Over the past few decades, it has diversified into other services, including in-flight catering and cruise terminal services. Gateway services now represent roughly half of total revenues. The company still has a large Singapore exposure, receiving 80% of its revenues from Changi Airport, with the largest overseas markets being Japan, India and China.
We think SATS two main businesses are very high quality. Anecdotal evidence suggests that SATS efficiency in its ground-handling operations as well as in its in-flight catering services are world-class. The company's customers include all the top airlines in the world including Singapore Airlines, British Airways, Air France, Finnair, KLM, Thai Airways, ANA, etc.
Capital allocation has so far been excellent. SATS CEO Alex Hungate is focused on the bottom line and has historically been very friendly to minority shareholders. Maintenance capex requirements of ~SG$50 million per year are modest, and enable the company to pay out 80% of its earnings as dividends. There has also been buybacks earlier in 2020 at levels just below today's share price.
SATS enjoys a number of secular tailwinds. Other than growth in Singapore's own population, Chinese outbound travel grew roughly 6% per year up until COVID-19. Singapore is one of the favourite destinations for Chinese travellers. Visitor arrivals to Singapore has also grown roughly 6% per year up until today. Another driver for the gateway services segment is air cargo volumes, which are closely connected to the e-commerce penetration in Singapore (now roughly ~5% of retail sales).
Air travel within the Asia Pacific has been hurt immensely by COVID-19. Passenger throughput has come down to almost zero. The main issue remains 14-day quarantine requirements for most countries across Asia. But green shoots are emerging. Travel bubbles are opening up between Singapore and Vietnam, New Zealand, Australia, Japan and soon Hong Kong. It may take a few more quarters before Chinese tourists are welcome to Singapore without any need for quarantine. But it will happen. Tourism is a key part of the business model of Singapore Inc. The government is incentivised to normalise tourism between mainland China and Singapore.
Asian air travel will likely recover within a 2-year time frame. SATS has a clean balance sheet with SG$732 million of cash at hand, which should be enough to cover even the worst possible downturn. Assuming a historical P/E ratio of 20x, the theoretical upside to intrinsic value could then reach +81% by 2024.
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