3 Wise Views on SATS Ltd

Three wise men were blindfolded and led one at a time into a room where an elephant stood. Each was asked to discern what was in the room without removing his blindfold.

The first, upon touching the elephant’s trunk, concluded a “snake” was in the room. The second, upon contacting a leg, concluded a “tree” was in the room. The third, upon grasping the tail, concluded a “rope” was in the room. All were surprised to discover the elephant once their blindfolds were removed.

— old Indian fable

You may have heard this old fable before. The three blindfolded wise men were not able to make a good guess of the complete picture (in this case, an elephant). It can be the same with investing.

For any potential investment, our own view may be limited, and we may miss some major points. We could always do with more intelligent and Foolish perspectives.

To demonstrate, let’s use catering giant SATS Ltd (SGX: S58) as an example. The business of SATS can be divided into two major buckets: Food Solutions and Gateway Services. You can read more about the company in here and here.

With SATS, I would like to share three possible views, from three differing investor personalities no less. They are the value investor, the income investor, and the growth investor.

The value investor’s view

Value investors love to get their hands on bargains and that’s why they pay attention to a company’s valuation and also compare it with other alternatives.

In this sense, SATS may not be a share that the value investor would be too enthusiastic about. At its closing price of $3.56 last Friday, SATS sported a trailing price to earnings (PE) ratio of around 20.3.

Meanwhile, the SPDR STI ETF (SGX: ES3) has a trailing PE ratio of 13.5. Since the SPDR STI ETF is an exchange-traded fund tracking the fundamentals of Singapore’s market barometer, the Straits Times Index  (SGX: ^STI), we can also say that the average PE of the market is 13.5.

As such, SATS’s valuation is higher than the market (the alternative), thus possibly damping the value investor’s interest in the catering outfit.

That being said, SATS does have traits which might attract the value investor. To that point, the company has a solid balance sheet with S$430 million in cash and equivalents and S$105 million in debt as of 31 March 2015. Additionally, SATS also generates a fair amount of free cash flow (more on this soon).

All things considered, the value investor may be intrigued but at the same time, he or she may have a hard time getting over the company’s higher valuation.

The income investor’s view

The first thing the income would likely notice about SATS is the company’s dividend yield of 3.9%. This is a fair bit higher than the 2.7% yield that’s offered by the SPDR STI ETF.

Another aspect about SATS which would likely also catch the eye of the income investor would be its track record with its dividends. Over its past five fiscal years, the company’s annual ordinary dividend has been rising. You can see this in the table below:

SATS's dividend history

Source: SATS’s website

For the period given in the table above, the catering giant also generated stable free cash flow (operating cash flow minus capital expenditures) and this trait is something the income investor would like to see as it could provide financial viability for the company’s dividend payout.

SATS's operating cash flow and capital expenditures

Source: SATS’s earnings report

SATS’s sources of revenue may also be deemed as recurring in nature and that can further add to the stability of the company’s dividend and that’s another trait in a business which the income investor may like to see.

When we put it all together, it’d appear that SATS could be one share that the income investor would be interested to explore further.

The growth investor’s view

When it comes to the growth investor, he or she might be more in the value investor’s camp than the income investor’s base in terms of the level of interest in SATS.


Source: SATS’s earnings report

The revenue for SATS’s Food Solutions segment has stayed more or less flat from FY11/12 (financial year ended 31 March 2012) to FY14/15. While the Gateway Services segment has picked up some slack, SATS’s overall revenue growth has still been rather tepid.

SATS Profit

Source: SATS’s earnings presentation

The profitability picture is better but not by much. The Food Solutions segment has had a strong showing here, with growing profits, but that’s offset by a weaker performance from the Gateway Services segment.

With this in mind, the growth investor might want to give SATS a pass by virtue of insufficient growth and its above-average valuation (as mentioned earlier).

Foolish summary

So, there you have it. Three quick perspectives from three different investor personalities looking at the same company. Thinking as different investor personalities and coming up with different views can be a useful exercise for us.

Collectively, the differing views may be worth much more than the sum of its parts.

So, do you – Foolish reader – have another company of interest in mind? Why not give the differing views approach a try yourself and then share it with us? We all may become better investors from sharing our motley views.

For more (free!) stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

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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.