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Can this Food Catering Giant Grow its Profits?

Welcome to the second part of the article on food catering giant SATS Ltd (SGX: S58). In my previous article, I covered on the sources of revenue growth for SATS. Today, we look at the profitability of the business segments.

As a quick recap: The company recorded capital returns of about 145% from 1 April 2009 to the closing price on last Friday (14 November 2014). By comparison, the capital gain returns of the SPDR STI ETF (SGX: ES3), a proxy for the  Straits Times Index (SGX:^STI), was 95% for the same duration. During the same timeframe, the company also distributed a total of 84 cents.

SATS has two major segments, Food Solutions and Gateway Services. The Food Solutions covers airline catering, food distribution, industrial catering and other services. The Gateway Solutions is involved in ground handling services of passengers, flights and cargo.

A closer look at profits

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look at the after-tax profit of its business segments as well as contributions from its associates and joint ventures.

Can this Food Catering Giant’s Profits Grow? - 1

Source: Company earnings report

As a reminder, SATS used to own a stake in The Daniels Group (categorized as “UK” in the graph) but it sold its stake to the Hain Celestial Group on 25 October 2011. The Daniels Group was housed under the Food Solutions segment. On top of that, SATS also acquired a 50.7% stake in TFK Corporation from Japan Airlines International on 20 December 2010. This explains the rise in profit contribution in the Food Solutions segment in the past four financial years.

Unfortunately, the Gateway Services profits have been trending downwards over the past five financial years. Meanwhile the contribution from its associates and joint ventures has been flat in this timeframe.

Can this Food Catering Giant’s Profits Grow? - 2

Source: Company earnings report

For another view of profitability, we can look at its operating cash-flow and capital expenditure over the past five financial years. SATS has been free-cash-flow (operating cashflow minus capital expenditure) positive for the past five financial years. This is important to note as the source of dividends that SATS pays comes from its ability to stay profitable over time.

Can this Food Catering Giant’s Profits Grow? - 3

Source: Company earnings report

Overall, SATS has had a nett cash position since the financial year ended March 2010 (FY09/10). In FY11/12, the catering company’s cash balance benefited from its divestment of the Daniels Group. The level of borrowing has also been gradually coming down after a large spike in FY10/11.

Foolish summary

At the moment, the Food Solutions segment is carrying the aspirations of the SAT’s topline and bottomline. Its dividend appears to be sustainable, given the nett cash position in its balance sheet and steady amount of free cash-flow. SATS’s revenue is primarily Singapore-based, so it may be affected by lower tourist arrivals, and lower number of flights in Changi airport.

As my previous article noted, we have keep an eye out for signs of revenue growth for the future, or how it can drive more share of profits by expanding its joint ventures and associates within the region.

As of last Friday’s closing price of $2.97, SATS traded 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.