3 July 2021
Dear Fellow Investor,
This morning I attended a zoom presentation by Shareinvestor.com for the rest of the year outlook for the KLSE. The main speaker was Kong She Siang who heads CGS- CIMB retail research.
His focus was both the technical and fundamental forces driving the market. The technical trend of the KLSE is down effected by the EMCO and political uncertainty. Most sectors are under a cloud including property, construction, health care, and hospitality . Bright spots include electronics, technology, logistics and export related stocks. His recommendations included Inari, Wellcall, Public Bank and Uchitech which we hold.
He also presented fundamental reasons why KLSE valuations are at multi year lows for certain blue chip stocks while the trade statistics for Malaysia are positive. Ratings agencies have not downgraded Malaysia but fear and Covid hysteria are effecting the KLSE and keeping buyers on the side lines.
He showed charts of Malaysian Covid infections, deaths, recoveries and vaccination rollouts. Vaccination rollouts are increasing nationwide, deaths are decreasing, recoveries increasing while infection rates are increasing. As more people are vaccinated hopefully infection rates should drop.
as they have in Singapore, Taiwan, Japan, Australia, Europe and the US.
Last week, I mentioned I would review SATS which I personally hold and also hold for some of our PGWA accounts. This research is from Smart Investor who is run by David Kuo formerly of Motley Fool. Analysis is by Royston Yang, a long experienced analyst. SATS is not just a turnaround stock but is a leading indicator for Covid 19 recovery which should benefit our portfolios.
Bloomberg daily chart of SATS with green arrows signaling insider buying. There are many reasons for insider selling but insiders only buy for one reason and that is they believe prices will go up. The last green arrow on the right side of the chart was a 300,000 share buy order by an insider. Who ever bought believes Singapore/ Asia/ Malaysia will recover and Covid will be a bad memory. Money talks.
SATS is Still Acquiring for Growth: Why I Believe the Company Can Turnaround
The ground handler and food caterer is pushing on with acquisitions as it gears up for the eventual recovery.
By Royston YangJune 17, 2021
2020 was one of the toughest periods faced by the aviation industry.
SATS Ltd (SGX: S58) did not escape unscathed.
As Asia’s leading provider of food solutions and gateway solutions for airlines, the group reported a massive hit to its top and bottom lines as the pandemic swept across the world.
Revenue for its fiscal year 2021 ended 31 March 2021 (FY2021) fell sharply by 50% year on year to S$970 million, along with an operating loss of S$10.1 million.
For FY2021, SATS registered a core net loss of S$23.9 million.
Despite the weak results, SATS continues to push on by announcing the acquisition of an 85% stake in Food City, a Thai frozen food producer, for S$21 million in early June.
Investors may be surprised to learn that the group is still on an acquisition trail.
This purchase comes even as peers Singapore Airlines Limited (SGX: C6L), or SIA, reported a massive net loss and cash burn.
SIA’s engineering arm, SIA Engineering Company Ltd (SGX: S59), also announced Phase 2 of its transformation program.
Here’s why I believe SATS is in a good position to engineer a turnaround.
Steadily improving financials
SATS has reported steadily improving core net profit since the outbreak of the pandemic.
During the quarter ended 30 June 2020 (1Q2021), when country borders started closing, the group’s core net loss was S$43.7 million, despite receiving government reliefs.
By 4Q2021, SATS was able to turn in a core net profit of S$13.2 million.
Even if we remove the effects of government reliefs, the numbers look promising.
From an initial net loss of S$106.5 million in 1Q2021, SATS has narrowed its net loss to just S$33 million.
Another positive point is that the group has continued to generate a healthy free cash flow of S$56.2 million for FY2021.
Cargo is a bright spot
The global economic rebound is triggering higher demand for air cargo.
Seasonally-adjusted air cargo volumes for March 2021 rose 4.4% above the pre-crisis levels logged in March 2019.
The International Air Transport Association (IATA) projects that air cargo volume will rise by 13% year on year for 2021, exceeding the level achieved in 2019.
SATS has associates in Hong Kong, India and Vietnam that handle air cargo, and these associates were profitable in 4Q2021.
With volumes expected to grow further, the growing profits from these associates can offset some of the losses from SATS’ core business.
Less reliance on the aviation sector
The pandemic also had the unintended effect of decreasing SATS’ reliance on the aviation sector.
Back in May 2020, an interview by CNBC with Alex Hungate, CEO of SATS, revealed that the group had already started diversifying into non-aviation catering over the last few years.
SATS also does catering for sectors such as defence, hospitals and schools.
The group runs central kitchens to produce food for restaurant chains such as Haidilao International (SEHK: 6862), RE&S Holdings’ (SGX: 1G1) chain of Japanese restaurants, and Disney (NYSE: DIS).
For FY2021, revenue from non-aviation industries accounted for 44% of total group revenue and chalked up year on year growth of 27.3%.
This proportion was a massive jump from the previous year when non-aviation revenue made up less than one-fifth of total revenue.
Increasing its food catering capabilities
The acquisition of Food City in June is just the latest in SATS’ acquisition trail to boost its food catering capabilities.
The new addition to SATS will provide the group with access to 32 meal production facilities across countries such as China, India, Japan, Singapore and Thailand, to name a few.
The move follows SATS’s purchase of food innovator Monty’s Bakehouse in May last year.
This commitment to growing its food solutions business to diversify away from aviation-related revenue should be lauded.
Get Smart: Positioning itself for the eventual recovery
To be sure, FY2022 is still going to be a tough year for SATS.
The bulk of its revenue is still aviation-based and its pivot to non-aviation food solutions will take time to build and grow.
Still, the group seems to be headed in the right direction.
Over time and with the possibility of further opportunistic acquisitions, I believe the caterer and ground handler should see better days ahead.
Take care
Bill
A tasty meal by SATS. We look forward to recovery so we can enjoy traveling and good food again.
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