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Sats Ltd’s Earnings: Strong Profit Growth Despite Lower Revenue

Sats Ltd  (SGX: S58) announced its financial results for its fiscal third quarter yesterday evening. The reporting period was for the quarter ended 31 December 2014.

The company’s a provider of gateway services (such as airfreight handling, bagging handling, and aviation security services etc.) and food solutions (such as airline catering) mainly for the airline industry. It currently has a business presence in 42 airports in 11 countries across Asia and the Middle East.

With these as a backdrop, let’s dig into Sats’ latest earnings release.

For the fiscal third quarter, revenue slipped by 3.2% year-on-year to S$450.7 million, mainly due to a 7.2% decline in revenue to S$270.2 million for the food solutions segment. This was partially offset by a 3.5% increase in revenue to S$179.4 million for the gateway services side.

The food solutions’ dip in revenue came on the back of “weaker performance from TFK, weaker Japanese Yen and loss of contribution from Urangan Fisheries which was divested in July 2014”. Back in December 2010, Sats had bought Japan Airlines International’s 50.7% in TFK, a catering outfit.

Although Sats’ top-line had lots of room for improvement, the firm’s bottom-line actually showed healthy growth – for the quarter, profit actually rose 25.2% year-on-year to S$53.7 million, representing an expansion in Sats’ net profit margin from 9.2% a year ago to 11.9% in the reporting quarter.

The profit growth was mainly due to a 5.6% decline in operating expenses which can be attributed to lower raw materials costs, employee costs, depreciation expenses, and other costs.

A higher profit was not the only bright spark with Sats’ fiscal third quarter – the firm managed to increase its production of free cash flow as well. The metric (which is essentially operating cash flow minus capital expenditures) went up from S$18.8 million a year ago to S$46.5 million.

Free cash flow’s an important figure for investors to track as a firm can use it to pay dividends, pare down debt, buyback its own shares, and reinvest into its own business. To those points, Sats has actually been consistently buying back its own shares over the past few months. Thus far for 2015, it has already bought back S$8.8 million worth of its own shares; for the whole of 2014, Sats had bought S$45.8 million worth of its shares.

Share buybacks can help enlarge existing shareholders’ stakes in the firm. In addition, if (and that’s a very important if) Sats’ shares happen to be undervalued, buybacks would be a very smart use of the company’s capital.

In any case, the free cash flow generated by Sats had gone some way in helping to strengthen the company’s balance sheet. As at 31 December 2014, Sats’ cash balance and total borrowings stood at S$358 million and S$102 million respectively; nine months ago at end-March 2014, the firm’s cash balance and total borrowings were at S$341 million and S$114 million, respectively.

Sats ended the press release document of its earnings announcement by commenting that the “operating landscape remains challenging as a result of competitive pressures in the aviation sector and continued rise in manpower costs”. But, the firm also added:

We have confidence in our strategy. Our focus on managing costs and improving productivity has begun to yield results. We will continue to invest in our state-of-the-art facilities, comprehensive suite of services and new technologies to drive economies of scale and enhance connectivity for our customers. We will also remain focused on growing new businesses and customer segments.”

Meanwhile, another firm in the aerospace industry, SIA Engineering Company Limited (SGX: S59), a subsidiary of Singapore Airlines Ltd (SGX: C6L), didn’t do as well in its latest quarter when compared to Sats. SIA Engineering announced on Tuesday that its revenue and net profit had declined by 6.5% and 23.5% respectively in its fiscal third quarter.

The market seems to like what it’s seeing with Sats as it’s up 1.7% to S$3.02 at the time of writing (9:28 am).

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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 Sudhan P doesn’t own shares in any companies mentioned.