Aviation In Singapore To Grow? Here Are 2 Stocks That Could Benefit

Gloomy headlines appear to be the order of the day in the current environment.

In 2015, Singapore’s gross domestic product (GDP) was estimated to have expanded by 2.1%. While growth is always welcome, that’s the slowest pace of growth the nation’s economy has seen since 2009.

Meanwhile, the stock market hasn’t fared well at all. At its current level of around 2,600, the Straits Times Index (SGX: ^STI) is nearly 27% below a 52-week high of 3,550 points.

In times like these, recent news about Singapore’s aviation scene is likely to be a breath of fresh air. In a Singapore Airshow Aviation Leadership Summit dinner yesterday evening, Singapore’s Deputy Prime Minister Tharman Shanmugaratnam mentioned in a speech that aviation in Singapore has big growth potential over the next decade and beyond.

As reported by Today, DPM Tharman also said that growth in Asia’s middle class (both in terms of their affluence and population numbers) can help drive demand for air travel. Meanwhile, with the price of oil sitting at a really low level of around US$30 per barrel at the moment, it can also be used to “open the skies further.”

Of course, big macro-economic predictions such as the above are hard to get right. But if Singapore’s aviation sector does indeed get to enjoy strong growth in the future, what are some possible ways for investors here to tap into the trend?

The following are two stocks which may enjoy some big tailwinds if aviation in Singapore were to grow: SATS Ltd (SGX: S58) and Straco Corporation Ltd (SGX: S85).

Touch down with SATS

SATS touches many aspects of air travel through both its business segments, Food Solutions and Gateway Services.

The former, which makes up the larger slice of SATS’ revenue (57% of total revenue in the company’s latest fiscal third-quarter), includes services such as airline catering, institutional catering, and airline linen laundry. Meanwhile, the latter (43% of total revenue) mainly sees SATS provide aviation-related services such as baggage handling, airfreight, and aviation security.

Chart 1 - SATS's free cash flow, net cash (cash minus total debt), and returns on equity
Source: S&P Global Market Intelligence (click chart for larger image)

Chart 1 just above shows how SATS’s free cash flow, returns on equity, and net cash (cash minus total debt) have changed over its last five fiscal years from FY2011 (fiscal year ended 31 March 2011) to FY2015.

What we can see are some positive signs: There’s a steady stream of free cash flow, a strong balance sheet with more cash than debt, and a decent return on equity of between 11.9% and 13.8% in each year.

Flying high with Straco

Prior to November 2014, Straco was a company with China as its main geographical market – the company’s main assets back then were two aquariums based in the Chinese cities of Shanghai and Xiamen. But in that month, Straco added a new Singapore tourism asset to its portfolio with the acquisition of the Singapore Flyer for S$140 million.

The Singapore Flyer, an iconic tourism landmark in Singapore, is one of the largest observation wheels in the world. It’s also a big asset for Straco, considering that the company’s total assets stood at only S$206 million in the third-quarter of 2014.

Chart 2 - Straco's free cash flow, net cash (cash minus total debt), and returns on equity
Source: S&P Global Market Intelligence (click chart for larger image)

As Chart 2 illustrates, Straco has managed to generate growing free cash flow from 2010 to 2014. Over the same period, the firm has also managed to achieve high returns on equity of between 14% and 23.5% in each year while having a rock-solid balance sheet that has had more cash than debt.

In the first nine months of 2015 – when there has been more time for the Singapore Flyer to flex its muscles for Straco – the company’s revenue and profit had experienced strong year-on-year growth of 42.4% and 28.5%, respectively, due mainly to contributions from the giant observation wheel and growth at one of the firm’s aquariums.

A Fool’s take

Given SATS’s wide reach in many aspects of air travel, growth in Singapore’s aviation scene could be a boon for the company. As for Straco, the Singapore Flyer’s fortunes will have links to inbound tourism to Singapore, which in turn is tethered to Singapore’s aviation market.

But, even if aviation in Singapore does exhibit strong growth in the future, it’s worth noting too that there can be many obstacles that can stand between a positive macro-trend and a company’s business growth. There are no guarantees that SATS and Straco can take advantage of this potentially beneficial trend and that’s something investors have to keep in mind.

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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 Chong Ser Jing owns shares in Straco Corporation.