In a recent article, I discussed the need to think in terms of decades and even generations when it comes to investing in the stock market. In the article, I mentioned: “It requires a considerable amount of time for any business to do well. By focusing on the long-term, we are forced to think about the quality and fundamentals of the company we are investing in. If we have an “investing” time frame of just one month, we would only be looking at stock price fluctuations alone, and this will be to the detriment of our portfolio. The daily fluctuation in…
In a recent article, I discussed the need to think in terms of decades and even generations when it comes to investing in the stock market. In the article, I mentioned:
“It requires a considerable amount of time for any business to do well. By focusing on the long-term, we are forced to think about the quality and fundamentals of the company we are investing in. If we have an “investing” time frame of just one month, we would only be looking at stock price fluctuations alone, and this will be to the detriment of our portfolio. The daily fluctuation in stock prices will not do any good for our psychological health as well.
However, if our investing time frame is measured in decades or even generations, we will be forced to think about the things that matter: The long-term prospects of a business; the leaders behind a company; and the value of a business. As Foolish investors, we want to invest in companies that have products or services that will not become obsolete in the next few years – ideally, we want companies with businesses that can thrive.”
I chose SATS based on three simple questions, which are inspired by one of the best investors in the world, Warren Buffett. I use these same questions when I look for stocks to add to my portfolio. The questions are:
1) Is the business simple to understand?
2) Does the company have a durable competitive advantage?
3) Will the business still be around for decades to come?
SATS Ltd provides food solutions and gateway services solutions, mainly to the aviation industry. In its financial year ended 31 March 2018 (FY17/18), of the S$1.72 billion in revenue, 86% was from the aviation sector. The food solutions segment provides in-flight catering, institutional catering, and the likes. Meanwhile, the gateway services division offers ground and cargo handling, passenger and security services, and baggage handling services, among others. In my opinion, SATS is a simple business to understand.
SATS has a dominant market share in in-flight catering and ground-handling services at Singapore’s Changi Airport. It also 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. In FY17/18, the share of results of associates and joint-ventures (net of tax) rose 9.2% to S$71.2 million. This massive network and SATS’ presence in many key airports should help to keep its competitors at bay.
Another way to find out if a company has a durable competitive advantage is to look at its return on equity (ROE). Generally speaking, a company that has a history of generating good ROE while employing little or no debt has a high chance of possessing a strong competitive advantage. The following shows how the ROE has improved for SATS from FY13/14 to FY17/18 (the firm had a debt-to-equity ratio ranging from just 0.07 to 0.08 times during the same period):Source: SATS Ltd FY17/18 earnings presentation
SATS’ ROE has climbed from 12.8% in FY13/14 to 16.2% in FY17/18 while employing very little debt. This is no easy task, and it shows the competency of the firm’s management team.
SATS is very likely to be around many years from now as its services are essential in both the aviation and non-aviation world. Its strong balance sheet should enable it to ride through the various economic cycles. As at 31 March 2018, SATS had S$373.3 million in cash and equivalents, and S$106.4 million in total borrowings, translating to a net cash position of S$266.9 million.
The Foolish takeaway
When investing in the stock market, we should look at the long-term and not bother about short-term pessimism. Hence, by thinking in generational terms, we would be forced to think about the things that matter about a business. SATS could be a keeper in your portfolio. However, before you own a piece of the company, you must ensure that the current valuation makes sense for you.
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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.