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

SATS Ltd  (SGX: S58) held its fiscal fourth-quarter earnings briefing 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-ventures that SATS has been pursuing over the past year. For information on the first three major deals that SATS has been working on, you can check out my earlier discussion here. From there, Hungate went on to talk about three adjacent businesses that SATS is also pursuing. These would be non-aviation related businesses.

You can see them in the following chart:

2016-06-01 SATS Adjacent Businesses
Source: SATS’s earnings presentation

During the presentation, Hungate talked about SATS’s divestment of some food distribution businesses to a joint venture, SATS-BRF. He said:

“BRF is one of the largest exporters of protein out of Brazil. I think it is one of the biggest food companies in Brazil. They already have significant market share of – for example frozen chicken and frozen pork – imports into Asia. They were already exporting to Singapore.

In fact, we had a long standing supply agreement with them.

We decided that we would take our food distribution business along with their food distribution business and combine them to create more scale. So, together we are the market leader in the import and distribution of proteins into Singapore.

We are creating better asset utilisation, from day one, by making that combination.”

The next step – in the future – will be to build on that base and start to develop  more package branded, further processed products into the Singapore retail market and also into segments like quick service.”

SATS-BRF began operations in June last year. Shifting the food distribution business from under SATS’s umbrella has benefitted its profit margins while combining volumes with BRF would enable better utilisation of SATS’s assets.

SATS also had two new partners. The first one is Wilmar International Limited (SGX: F34), a Singapore-listed agribusiness conglomerate. Hungate described the reasoning behind the deal:

“Two assets that make them an interesting partner for us.

One is the logistics and supply chain which has been established for many years. Because one of the challenges of doing high volume, safe food production is the traceability of the food ingredients.

The second thing that they have is because they are a large provider into China, they already have a range of food customers that are very interesting for this new venture. So, they supply those customer with commodities, what we want to do is to supply them with cooked food from the central kitchens that we will put up together.

So, we will build a series of central kitchens across China, over the next several years. We are beginning to find those locations now and will build those progressingly.”

In essence, SATS benefits from the supply chain expertise of Wilmar while contributing its own expertise in running large scale central kitchens. Hungate added that Wilmar has the customer base and relationship with the authorities that can make it easier for the SATS-Wilmar joint venture to expand.

Hungate also acknowledged that the venture will be starting from scratch and that results will not show up in the near term.

The third joint-venture SATS has been working on is with Duty Free Air & Ship Supply (DFASS). Hungate added his thoughts on this:

“I talked earlier about the strategic role that buy-on-board can play for a company that has a lot of touch points with ten of millions of passengers as they travel around Asia, both before they board and after they disembark from the planes.

I also said our air freight and eCommerce capabilities were an adjacency that we were moving into. Somewhere in between both of those assets, you have the opportunity for travel retail. This is our first venture in travel retail.”

Hungate also described how the collaboration would work:

“DFASS was the incumbent for Singapore Airlines Ltd  (SGX: C6L), here in Singapore. They are based in Miami. They specialize in buy-on-board duty free. So, they have purchasing relationships that we don’t have. They have also have some operating expertise and technology for buy-on-board which we didn’t have.

But what we were doing for them – which is really how this opportunity started to be discussed – was that we were loading these duty free carts to get those carts onboard. So, in the traditional model, everything that you sell onboard has to get on the plane through duty free carts – and we have a bonded access to air site which they don’t have.

We have touch points with the customers before they get on the plane that traditional vendors don’t have. And also we can look for alternative ways to deliver the goods to them.

Our model is actually broader than the traditional buy-on-board model.”

SATS’s chief executive said that the joint venture is still very much in its early days. But, he sounded upbeat about the fact that it has already won three large accounts in Singapore Airlines, SilkAir, and Scoot (incidentally, SilkAir and Scoot are both part of Singapore Airlines). As a result, SATS has gone from zero to a market leader in short order.

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 and contribute to the company’s bottom-line.

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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.