SATS - The Airline Caterer

27 July 2019

Dear Fellow Investor,

Today, I will review SATS, the airline caterer who just announced their quarterly results

SATS encountered some short-term turbulence which could drag on. That said, the airline caterer remains financially sound and I continue to believe in the long-term growth trajectory of SATS — that is what investors should be focusing on.  

The earnings update: 

Revenue showed solid gains — but profits fell:  In the pessimistic Asian market environment the share price fell but was supported on the weekly chart  

SATS did generate Sgd 80 million in operating cash flow and spent Sgd 10.4 million in capex which resulted in free cash flow of Sgd 70 million a touch lower than last year but still at healthy levels.

Going forward is the contribution from GTR Sdn Bhd, ground team red, which is the joint venture between Air Asia and SATS. This will allow ground catering exposure to Philippines, Thailand and Indonesia.

Above is a summary of the GTR venture

Source: SATS Capital Markets Day

2. Lower cargo volumes  

Another headwind that SATS experienced was lower cargo volumes. SATS is seeing lower cargo volumes mainly in Singapore, but also across the region on the back of softer economic conditions. 

On a positive note SATS is the market leader in India for ground handling and catering and this is growing.

Also its Kunshan central kitchen in China has broken even in less than 2 years as their customer base continues to grow and the Marina Cruse Centre is seeing a higher load of customers as more liners make port calls and the capacity of the new cruise liners  holds over 2000 PAX which is   50% more than the older liners.

Based on the growth of air travel in Asia and based on SATS cash pile and their ability to allocate capital in profitable growing ventures, I am optimistic for their future.

The next share I will review is Wellcal. They manufacture a wide range of rubber hoses including food and beverage hose, chemical hose and steam hose. They are net cash; pay a reasonable dividend of 5.2% and with the new JV with Trelleborg, a Swedish hose maker should be able to increase their profit margins. Presently volume is very low as most players are not interested in this share.  As long as weekly support holds I would advise keeping this share. One large fund in the UK is quietly accumulating. The recurring revenue they generate from their hose replacement business will sustain their cash flow.

The last share I will report on is Inari. They are well supported on the rise of Apple and the bottoming out and rise of the semi-conductor shares.  This could be a signal of a near term trade war resolution.  China wants the Hong Kong demonstrations to end so they may be motivated to strike a trade deal with Trump.

I am presently looking for opportunities in the technology space.  

Invest well and grow your wealth
Bill

Critter of the week is Geronimo an Alpaca who is wanted dead by UK government officials. The government claims he has TB, but the owner, and private vets have proved he is free of TB.  If you Google this story you can sign a petition to save the life of this beautiful animal. More than 60,000 have already signed. 

Geronimo and his owner



 

Our holdings review

20 July  2019

Dear Fellow Investor,

This week I will review our holdings in Thai Beverage, Genting Malaysia, HL Bank  and Dialog.

On 13 May 2019 Thai Bev. dropped 12% to SGD 0.72 on their second quarter earning release. Earnings came in lower than expected so Thai Bev was sold down by panic stricken investors. Company insiders/funds knew more than the uninformed retailers and bought into the panic. Thai Bev has since recovered and last traded at 0.855. We continue to hold and collect our dividends.

On Friday we sold our Hong Leong Bank shares for a small profit  Although it is a quality bank valuations have become expensive. Other banks in their space offer better value. It also broke a major chart support.

Dialog has recovered from a deep sell off  due in part to a 5 year  maintenance contract awarded recently by Petronas. This gives them recurring revenue to  augment their recurring revenue from their tank farm operation.

Genting Malaysia is also slowly recovering after  3 black swans  hit the company in December 2018.   Lim Kok Thai, the CEO  personally bought 27 million shares last month in the face of all the bad news. Perhaps the FOX/ Disney law suit may be resolved ?  I noticed Genting posted full page ads in our local papers advertising for well paying theme park jobs. That is a vote of confidence in their growth potential. They certainly are not going to close their theme park.

All our shares are quality value+ growth investments. I do understand your concerns given all the uncertainties and volatility. Please contact me if you have questions on your investments  I am always happy to clarify.

Short term volatility is the price we pay for outperformance and long term wealth building.

Invest well and grow your wealth,
Bill

Critter of the week  is the Komodo Dragon, the world’s largest lizard. There are only about 5000 left in the wild so the Indonesian government is closing  the Komodo national park for 1 year to restore the environment and improve the living conditions for the dragons.

 

Rubber Glove Holdings Review

13 July  2019

Dear Fellow Investor,

This week I will review our rubber glove holdings including Kossan and Riverstone as well as EWH, the Hong Kong country fund we hold in our PGWA accounts.

Kossan 1Q 2019 results were ahead of expectations  undemanding at PE 19 while big cap peers are at  an average of PE 31. This leaves room for further gains

The big overhang in the rubber glove industry has been oversupply but that pressure has eased as demand has caught up with supply. 

Kossan profits have jumped 32 % year on year which reflects in the up trending price. I am optimistic for more gains.   

Riverstone is listed in Singapore and has operations in Malaysia, Taiping, Thailand and a small presence in China. They have a market niche in clean room gloves for the semiconductor industry. They also produce for the health care sector.  Valuations are reasonable trading currently at a 32 % discount to peers. Earnings have been stable for the last 3 quarters. Lower raw material costs  add to their profit margins as well as the weak RM exchange rate versus the USD.

The company has very strong financials and should benefit with a recovery in semiconductors. We visited the company recently in Rawang and what stands out is their prudence and fanatical focus on innovation and managing costs .

The last holding I will review is  EWH.  EWH is listed on the NYSE and represents  25 blue chips in Hong Kong.  Many of these blue chips have exposure to China.

Despite the civil unrest in Hong Kong and  trade wars our EWH investment has held up well however;. I plan to take profit on our EWH and switch into a Singapore country/ REIT fund.

I read a research report on Hong Kong by an established broker and it details how smart money is moving out of Hong Kong and moving to Singapore. 

Cramped living quarters in Hong Kong

The report also details the reasons behind the riots. One is the frustration of the younger generation  toward the high cost of property and cramped living. Most  citizens have to pay exorbitant prices to buy or rent a small living space. They blame the government.

Singapore by contrast living is much more citizen friendly and an HDP flat is spacious and affordable. Like Hong Kong  taxes are low and business is encouraged but unlike their counterparts in Singapore they do not suffer from overcrowding, protests or civil unrest. I always like to invest were the citizens are happy.

Invest well and grow your wealth.
Bill

Critter of the week in a Russian spy whale which escaped its cage and swam to Norway. It wound up in a small coastal village and has become friendly to the villagers who pet his nose and play with it. I do not think this happy whale  will swim back to a cage in Russia.

Major sign of world recession

6 July  2019

Dear Fellow Investor,

On 4 July, Thursday, I visited my stock market analyst who I have been working with for over 20 years. He is correct in his views most of the time and has helped  keep us above the water during periods of volatility,  political and market uncertainty, and economic slowdown.

His best call was a warning he gave me a few months before the sub-prime collapse in 2008 and subsequent recession.

He advised to become defensive and hold only the strongest blue chips, some gold  and sell any speculative shares.

His advice was early but thanks to heeding it we survived the worst of the disaster and moved in the next 2 years to equity highs both in Malaysia and Singapore.

He is currently advising that many of the pieces of  a world recession are coming together . Recession he said is a process and not an event. All world markets will be effected.

A major sign of world recession is in the below chart from CNBC. It shows a yield curve inversion between to 10 year US Treasury Bond and the 3 year bond. Even more impactful is the inversion between the 30 year bond and the 3 year bond. Should the US enter recession the all world markets  will be effected. 

It means there is a cash squeeze and investors are willing to pay more for cash now than paying for cash in the future. In Malaysia every recession since the 1970s has been preceded by a yield inversion. So far the yield curve in Malaysia has not inverted but we need to remain vigilant.

Another negative factor is that on 3 July 2019 according to Bloomberg only 77 stocks in the major  world markets were making new highs.  This shows narrowing breadth  as insiders are booking profits while retailers continue to chase.

His advice was that we have a 2 month window to sell any speculative holdings.

He reviewed our portfolios and advised specifically what to sell/ what to hold  and most importantly he advised to sell before the crowd sells.

Gold a few days ago made a 5 year high. This is also a negative sign which shows lack of confidence in governments, central bankers and world leaders.

Will these officials allow more deflation, inflation or stagflation ?   I do not know but we must be diversified  to protect ourselves. That means reits, property,  high income dividend shares in Singapore, Hong Kong and Malaysia. and some gold.

Invest well and grow your wealth

Bill

Critters of the week are some Russian orca whales recently freed due to a world outcry. The Russians were keeping them in a whale jail to  sell to marine parks.