Can this Food Catering Giant Continue to Grow?

SATS Ltd (SGX: S58) has been an outperformer over the last five plus years. From 1 April 2009 to today, the company has recorded capital gains of about 145%.

By comparison, the capital gains of the SPDR STI ETF (SGX: ES3) was 95% for the same duration. The SPDR STI ETF is a proxy for Singapore’s market benchmark, the Straits Times Index (SGX: ^STI). During the same timeframe, the company also distributed a total of 84 cents per share in dividends.

Although the returns from SATS has been tasty, as Foolish investors, we should look behind the curtains to understand how the company can continue to grow.

A closer look

SATS has two major divisions, namely, Food Solutions and Gateway Services. The first division covers airline catering, food distribution, industrial catering and other services. Meanwhile, Gateway Solutions is involved with airfreight, bagging, ramp handling, cargo, and passenger services etc.

SATS serves airlines such as Singapore Airlines Ltd. (SGX: C6L) and Tiger Airways Holdings Limited (SGX: J7X).

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Source: Company Presentation

Revenue for SATS has grown from S$1.53 billion in the financial year ended 31 March 2009 (FY09/10) to S$1.78 billion in FY13/14. Although its revenue growth looks anemic over the past five years, the picture actually looks better when we look under the covers.

On 25 October 2011, SATS sold its stake in The Daniels Group (categorized as “UK” in the graph above) to Hain Celestial Group – in the process, SATS lost a revenue contributor. From the graph above, the Food Solutions division managed to post strong revenue growth in FY11/12 to pick up the slack. Meanwhile, the Gateway Services division had also grown its top-line steadily as well in the same duration.

Next, we can look at SATS’s revenue from a geographical perspective.

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Source: Company Presentation

From this view, we can see a new source of revenue from Japan coming from FY10/11 onwards. This comes from SATS’s December 2010 acquisition of a 50.7% stake in TFK Corporation from Japan Airlines International. It is likely that much of the growth in the Food solutions business came from this acquisition.

We can also see that Singapore remains the key geographical area for driving future sales growth for SATS as it accounts for almost 80% of the company’s total revenue in FY13/14. On that note, it’s also worth pointing out that sales growth in Singapore has been going at a rate of about 4.5% per annum in the five financial years above. Japan, on the other hand, had suffered a 20% drop in revenue in FY13/14.

Finally, we can look at SATS’s revenue from an industry perspective.

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Source: Company Presentation

As the chart shows, SATS is still very much reliant on the aviation industry. In fact, only 20% of the company’s revenue in FY13/14 came from a non-aviation source. The growth in revenue related to the non-aviation industry has been tepid in the past three financial years as well.

Foolish take away

The exercise above is to look at SATS’s sales growth alone. Moving forward, we should also observe if the topline growth manages to trickle down to the bottom-line. But, that’s a story for another day.

Meanwhile, it would seem like much of the foreseeable sales growth for SATS will come from Singapore and the aviation industry. From the company’s short track record with acquisitions, it’s hard to see if any reliable future sales growth can come from acquisition-related sources.

As of today’s closing price of $2.96, SATS is trading at a trailing earnings ratio of about 19, and has a dividend yield of around 4.4%.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.