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3 Ways SATS Ltd Can Ride Asia’s Mega-Trends

SATS Ltd  (SGX: S58) held its fiscal fourth-quarter earnings presentation recently.

Alex Hungate, SATS’s chief executive, included a summary of three big trends happening in Asia that the company is excited about. First off, 66% of the world’s middle-class population in 2030 is expected to be found in Asia. Second, Asia’s food consumption is expected to more than double over the next five years. Last but not least, air travel within Asia is expected to triple within the next two decades.

But, Hungate also made a salient point during the briefing:

“So, these are the big trends which makes us excited about the future. The question is how are we going to execute on those things?”

That’s a good question that deserves some answers.

Partnering Asia

Hungate shared details about the joint-venture partnerships that SATS has been pursuing over the past year. Three major deals are summarised in the slide below:

2016-06-01 SATS JV
Source: SATS’s earnings presentation

During the presentation, Hungate talked about the joint venture agreement with Oman Air. SATS signed the agreement in March this year. He said:

“Oman Air is the national airline of Oman. It has an existing cargo operations in Muscat Airport. They are contributing that cargo operation serves their own airline plus other third party airlines that use that airport.

It’s our first cargo venture into the Middle East. The Middle East is obviously an important cargo market. It’s not the largest cargo hub in the Middle East, as we all know. But it is a chance for us to enter that market and to enhance the connectivity in and out of Asia from the Middle East.”

SATS will be investing around S$22.5 million for a one-third stake in the Oman-SATS Cargo LLC joint venture. The combined entity is expected to start operations in the second quarter of 2016. Oman-SATS will be the single source cargo operator at the existing cargo facility and subsequently, the new Muscat International Airport.

Next up, we move north to Malaysia with Brahim’s Airline Catering Holdings (BACH). Hungate added his thoughts:

“The next one is Brahim-SATS. It’s the largest flight caterer in Malaysia. SATS has never had the opportunity to be in the flight catering market in Malaysia before, but this is a classic example of how a restructuring of a particular airline has create opportunities for us to get involved in a new market.

We know about the restructuring because it has been very much part of the news. But with the encouragement of the airlines, in this case, we’ve gotten together with Brahim’s as a third party public company in Malaysia and we have 49% stake in the entity which partners with Malaysian Airlines to provide catering at KL [Kuala Lumpur] and Penang airport.

Their market share is something like 90%. We believe that the KLIA [KL international airport] volumes will continue to grow, notwithstanding some of the restructuring that the main airline there has done. The airport itself will continue to grow.

We believe that we are buying in at a time which is the nadir of their progression as a flight caterer. We can help them to improve profitability and also enjoy increasing operating leverage as the volume in KLIA continue over time.”

The BACH deal seems more opportunistic for SATS. Nevertheless, it provides SATS with a foothold into a market that it has not been able to participate in prior to this deal. The conditional agreement was completed in February this year for RM218 million. It consists of a base consideration of RM 110 million and an additional sum of up to RM 108 million if certain financial targets are met.

Last but not least was the expansion of SAT’s relationship with MacroAsia in Philippines. Hungate said:

“This is a long standing partnership that we have with MacroAsia catering services. We only had a small stake and part of our strategy of focusing on scale is to make sure that the entities that we are involved in, we actually have a more material say in how they’re run and a more material share of the upside as well.

This entity is the main flight caterer in Manila, but it is also increasingly moving into non-aviation catering in Philippines as well – which is something we know about and where we can bring expertise into there. Our partner, the Lucio Tan Group, recently took back over Philippines airlines as well. So, that happened all in the last year. So, we see further opportunities on further consolidation within the market them as the base airline customer.”

In contrast to the first two deals, SATS already had an existing 20% stake in MacroAsia. The latest deal was an expansion to a 33% stake.

More on the table

As of 31 March 2016, SATS had a net cash position of S$380 million on its balance sheet.

And it looks like SATS is not done yet with striking up new deals and partnerships. Last week, the catering operator subscribed for a 20% stake in Purantara Mitra Angkasa Dua (PMAD) in Indonesia. The deal is expected to cost SATS around S$11.3 million.

As investors, we may want to observe to see how these deals pan out for SATS.

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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 company mentioned.