On 21 May 2019, the market closed with shares of SATS Ltd (SGX: S58) at S$5.09 each. The company’s shares have grown around 230% over the past decade. In comparison, the Straits Times Index (SGX: ^STI) rose only 36% over the same time frame. How did SATS manage to produce such a great return in the past decade, beating the Straits Times Index so handsomely? There are three possible reasons.
Great underlying business
SATS is a provider of food solutions and gateway services solutions. Under the food solutions business, it provides services such as in-flight catering and institutional catering. Under the gateway services solutions segment, it is involved in ground handling, security services, and baggage handling, among others.
SATS has been growing its business from strength to strength over the last 10 fiscal years. Over the long term, a company’s share price tends to rise in tandem with the underlying business.
From FY2008-09 (the fiscal year ended 31 March 2009) till FY2018-19, SATS’s revenue has grown from S$1.06 billion to S$1.83 billion. Meanwhile, net profit attributable to shareholders improved from S$146.8 million to S$248.4 million. The share of profits from SATS’s associates and joint ventures has also shown tremendous growth, improving from S$22.2 million to S$58.9 million during the period.
The company has been able to grow both its top and bottom lines by using very little leverage. The debt-to-equity ratio has been below 0.20 times throughout those years. It ended FY2018-19 with a debt-to-equity ratio of just 0.06. As of 31 March 2019, it had S$349.9 million in cash balance and S$95.7 million in total borrowings.
Return on equity (ROE) has also improved from FY2008-09 to FY2018-19. In FY2008-09, it had a ROE of 10.5%, but this has swelled to 15.1% in the latest fiscal year. The improving ROE with negligible debt demonstrates the competency of SATS’s management team.
SATS’s dividend growth also had a significant impact on the return.
In FY2008-09, SATS dished out a total dividend of 10 Singapore cents per share. This has grown to 19 Singapore cents per share in FY2018-19. The dividend has climbed 90% over the past decade, or 6.6% per year. That dividend growth more than beats the long-term average Singapore inflation rate of between 2% and 3%.
Inclusion in the Straits Times Index
Another reason for SATS’s share-price growth could be its inclusion in the Straits Times Index.
In September 2015, the company joined the likes of Singapore Telecommunications Limited and Singapore Airlines Ltd to be part of the Singapore stock market benchmark, which consists of 30 shares. (Fun fact: SATS went public in 2000, and it used to be part of the Singapore Airlines group until it was divested fully in September 2009.)
Addition to the index means SATS is more well-known among investors, and it’s also an “endorsement” that SATS is investment-worthy. According to the Straits Times Index creators, only stocks that “pass the relevant investability screens” are included in the index.
Can the phenomenon continue?
SATS has done well in the past in terms of financial and dividend growth. However, can the company continue doing well in the future?
In my opinion, there’s no reason to believe SATS cannot deliver great shareholder returns for the next 10 years, just like it has done over the past decade. Global air travel continues to grow, and it’s projected to double by 2035. Asia is expected to be the biggest driver of that demand. As the leading provider of food solutions and gateway services in Asia, SATS is well placed to capture growth in this part of the region.
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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.