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