A return to “normal” is on the cards. And SATS Ltd (SGX:S58) is poised to ride on this.
There’s talks of “air travel bubbles” and hopes that we can travel overseas for holidays soon — once the Covid-19 vaccinations have gathered speed.
I think vaccination is a huge step in reopening many of the economies. Because this allows “herd immunity” to be achieved.
Singapore has been in talks with a few countries including Taiwan, Australia and New Zealand for an air travel bubble.
And what’s important here is not just about a recovery in global travel, but companies that serve the broader air travel industry.
SATS Ltd is a S$4.8 billion ground-handling and food services company listed in Singapore, and has been around for 48 years.
This Singapore blue-chip makes sure your luggage is stored securely in the airplane, arrives safely at your destination, and awaiting for you at the arrival belt .
Besides that, SATS Ltd dominates the in-flight food catering business for many airlines parked in Changi Airport.
Today, the company controls 80% of Changi Airport’s ground handling and food catering businesses.
SATS Ltd is far from dead
The Covid-19 pandemic has put all of SATS Ltd business to a complete stop. Air travel, as we all know, was ravaged by the pandemic last year.
In its latest third quarter financial results, SATS Ltd reported further losses from both its ground-handling and food services.
Total sales fell a staggering 54% to S$251 million as compared to last year, while the company racked net losses of S$2.8 million, down from net earnings of S$60 million from a year earlier. Fifth Person gave a good summary of SATS Ltd’s AGM 2020 here.
But this is just half the story told.
You see, the business which SATS Ltd is in, is what I like to call “capital-efficient”.
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And you know this when SATS Ltd’s 10-year return on invested capital (ROIC) is an above average 12.5%.
ROIC simply measures the money you make from every dollar you invest into the business.
SATS Ltd, unlike airline companies, doesn’t need much capital to run its business.
That’s why over the past 10 years, the company was able to accumulate a huge cash pile from its years of generating free cash flow (FCF).
Its FCF averaged S$177 million per year between 2011 and 2020.
And that allowed SATS Ltd to build a fortress-like balance sheet over the years. In my opinion, this will help the ground-handling and food services giant tide through this pandemic crisis.
The fact is, the company has S$808 million in cash that more than covers all of their debt.
And that speaks volume of a financially-strong company.
The hope for SATS’s recovery to a pre-Covid “normal” is bright
According to a DBS Group Research stock report, about 38% of the world’s population will be vaccinated by the end of this year. And herd immunity will be achieved by the end of 2022.
What this means is global travel should fully open by then.
And as more Covid-19 vaccines are distributed across the globe, SATS Ltd is positioned to ride the travel recovery.
According to SATS Ltd, international air cargo volumes have improved from a 8.5% decline year-on-year to 3.9% decline year-on-year, just last year.
Further, SATS Ltd’s cargo associates in Hong Kong, Taiwan and Vietnam returned to profitability in the latest third quarter with cargo sales up 22% quarter-on-quarter.
Buying a “capital-efficient” business before its engine roars again
That’s why SATS Ltd share price has recovered 32% over the past year (see below chart).
Source: Yahoo! Finance
And given that there’s a huge pent up demand for air travel, I believe this company’s gains is ready to fly.
SATS Ltd has rewarded shareholders with abundance. It paid dividends year after year since 2000, growing from 5.5 cents per share to 19 cents per share in 2019.
But last year, it cut its dividends to 6 cents per share because of its poor financial results.
For me, with the air travel recovery in sight, I think this cut is temporary.
You see, SATS Ltd can return to its “normalized” operations once the vaccines are done, the air travel restrictions lifted.
SATS Ltd should resume its regular dividend pay out.
You’re looking at a Singapore “capital-efficient” giant paying you 4% dividend yield, with dividends to continue growing year after year.
For me, as a long-term dividend investor, this is how I’d look at a dividend grower.
If you ask me, SATS Ltd is something worth keeping a look out for.
And I expect the best gains have yet to come.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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