Would SATS Ltd’s Latest Expansion of Its Food Distribution Business Help to Jumpstart Profit Growth?

You might not know this, but it’s likely that SATS Ltd (SGX: S58) is the one providing the food you eat on flights you board from Singapore; preparing meals for airlines has long been part of SATS’ business.

But, the company has also steadily diversified its clientele away from the airlines over the years. Today, non-aviation related revenue makes up nearly 20% of SATS’ overall sales.

It seems like SATS is not stopping there.

Just yesterday, the company announced that it will be forming a joint venture with BRF GmbH. SATS’ latest business partner is a subsidiary of BRF S.A. (BRF), a Brazilian company listed in both Sao Paulo and the New York Stock Exchange and which also happens to be the world’s seventh largest food company by revenue.

Besides controlling 20% of the global poultry trade, BRF also processes and distributes a multitude of food products like meat, margarine, pasta, frozen pizza, and different types of vegetables.

SATS and BRF already have a close business relationship prior to this new tie-up with the latter being a key supplier to the former.

The joint venture, called SATS BRF Food Pte. Ltd., will be 51% owned by SATS. Meanwhile, BRF will be paying SATS S$26 million for the remaining 49% stake.

The two companies hope to use the new joint venure as a platform to start a food distribution and meat processing business. The intention is for the joint venture to “grow its portfolio of branded food products for the Singapore market and to expand into other Southeast Asian markets over time.”

As the joint venture has a book value of only S$61 million as of 31 March 2015, it’s likely that it would have little impact on the short-term profitability of both its owners (as of 31 December 2014, the selfsame figures for SATS and BRF are S$1.47 billion and S$7.82 billion respectively).

But, given that Southeast Asia is home to some of the fastest growing economies in the world, the potential of this joint venture shouldn’t be underestimated.

Foolish Summary

All that being said, it’s worth pointing out that SATS’ past corporate performance has not been encouraging.

Despite seeing its revenue nearly double from S$895 million in FY2002 (financial year ended 31 March 2002) to S$1.79 billion in FY2014, SATS’ net profit had actually declined over the same time period from S$213 million to S$180 million. It appears that any growth that SATS has enjoyed in sales has been more than offset by increased expenses and lower gross margins.

As such, despite the promise that the new joint venture with BRF brings, it’s worth thinking about issues like the possibility of SATS reining in its costs over time.

If SATS is not able to control its own costs effectively, any future growth in revenue might still be for naught.

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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 writer Stanley Lim doesn't own shares in any company mentioned.