SATS Ltd (SGX: S58) provides food solutions and gateway services solutions, mainly to the aviation industry.
The SATS share price closed at S$4.87 apiece on 20 June 2018, which is down 16.8% from a peak of S$5.85 seen in January 2018. In comparison, the Straits Times Index (SGX: ^STI), which SATS is part of, declined by “only” 6.6% during the same time frame. The share price of S$4.87 is also just a few percentages away from the 52-week low price of S$4.57.
Possible reasons for the decline
The market should have been disappointed by the slow growth of the business of late, hence the fall in the SATS share price. The slowdown in the business culminated in its revenue for the fiscal year 2018 (which ended on 31 March 2018) slipping by 0.3% while underlying net profit was up by just 0.8%; net profit improved by only 1.4%.
The bottom-line growth rate is nothing spectacular, especially when the valuation for SATS is way above the market average. SATS was trading at a trailing price-to-earnings (PE) ratio of around 23 times when both the financial results for the full year ended 31 March 2017 (FY2017) and FY2018 were announced. The SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index, had never traded at such lofty valuations during those periods.
At high valuations, if a company does not deliver according to the expectations of shareholders, its share price has to give way.
There’s still hope, buddy
However, all is not lost. I feel that growth for the SATS share price in the years ahead is still intact.
The middle class in Asia is growing, and this should translate to increased air travel in the region. Singapore is certainly part of Asia’s growth story, and with SATS being the dominant player at Changi Airport, the ground handler and in-flight caterer should continue to perform well. There is also the increased e-commerce activity throughout the world.
SATS has a strong network of joint ventures and strategic alliances in many countries. It is currently present in 60 airports and 62 cities across Asia and the Middle East. The large network enables SATS to enjoy the tailwinds of increased air travel in the region.
On top of those factors mentioned above, there are also abundant opportunities for SATS with its joint venture with AirAsia Berhad (KLSE: 5099.KL), Malaysia’s largest airline and Asia’s largest low-cost carrier (by passengers carried). The joint venture, which is a ground handling partnership, has already contributed to the company’s earnings in the 2018 fourth-quarter.
There is also the optionality for further growth for SATS at the new Istanbul airport in Turkey. SATS has a memorandum of agreement (MOA) inked with Turkish Airlines where SATS will provide in-flight catering services to the airlines and other airlines at the airport. If the deal is clinched, SATS could see further improvements in both its top and bottom line.
SATS is also investing heavily in technology. For example, in SATS’ 2017 annual report, the firm highlighted that it uses integrated smartwatches in the technical ramp operations, which is a world first. The technology increases “service agility, while achieving higher levels of safety and collaboration”.
In its FY2018 earnings release, SATS said that “the deployment of technology has enabled us to handle the growing traffic with increased productivity and helped to offset ongoing price pressure” at Changi airport.
The improved technology that SATS is using should help to lower operational costs for the company and increase its net profit margin.
The Foolish takeaway
The stock market is not liking what it is seeing with SATS at the moment. The bottom line growth rate is nothing to shout about, and with high valuations, the market is expecting SATS to deliver more. In the years ahead, though, investors may see things picking up for the firm due to the various tailwinds that it can enjoy.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of SATS Ltd. Motley Fool Singapore contributor Sudhan P owns shares in SATS Ltd.