Would Peter Lynch Buy SATS Group?

SATS logoIf you ever want to know what a support services company does, just take a close look at SATS (SGX: S58). Whether it is in-flight catering, hospital meals, linen and laundry services for airlines and hotels, SATS does it.

But would that be enough to impress legendary investor Peter Lynch.

Peter Lynch has an affinity for simple businesses – so simple, in fact, that you should be able to describe it using a crayon. In the case of SATS, you could almost do it blindfolded. SATS is all about taking a simple business model and doing it well. Around three quarters of the company’s revenues is generated from food solutions and the remainder from gateway services.

Valuation is something that Peter Lynch pays special attention to. With the shares at S$3.12 a pop, SATS is valued at 17 times prospective earnings. That is not cheap, when the Singapore market is valued at around 13 times earnings. That said, the valuation is not a million miles away from its historical average. However, with earnings growth at an anaemic 3%, the PEG ratio works out to be an unappetising 4.3.

The same cannot be said about its balance sheet, which looks remarkably strong. SATS is sitting on S$354m of cash and it has debts of S$116m. In other words, it has net cash of S$238m.

SATS also pays a dividend – a generous one to boot. Its dividend yield is a market-beating 4.8%. What’s more, with a payout ratio of about 70%, SATS should have plenty left in the tank.

On balance, SATS looks an attractive stock for income investors. Its payout over the years has been consistent, which yield-seekers could find comforting. However, for a growth investor such as Peter Lynch, SATS is unlikely to make the grade.

Since the turn of the Millennium, the shares have appreciated around 3%, which combined with a 4% would imply a total return of 7%. You could achieve a similar result with a low-cost Singapore index tracker.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.