SATS Ltd (SGX: S58) is a ground handling and in-flight catering service provider at Singapore Changi Airport. The Gateway Services division offers services such as airfreight handling, baggage handling, and aircraft cleaning. The Food Solutions division includes airline catering, aviation laundry, and also food distribution and logistics.
On 30 May, SATS held its inaugural Capital Markets Day, where management presented its strategies, plans, and vision for growing the business in the next three to five years. It was an interesting, insightful, and detailed presentation, and the slides also revealed more information than what SATS used to disclose, particularly on its varied associates and joint ventures.
Here are two key findings I took away from that presentation that I feel will drive the business to the next level in terms of revenue and earnings growth.
1. Central kitchen for China and India non-aviation customers
SATS intends to open up a new third leg of growth in addition to its two current core divisions. As a recap, SATS has a Gateway Solutions division that services clients such as Cathay Pacific, Korean Air and Jetstar Asia. Its other core division is Food Solutions, which provides catering services for clients such as Haidilao, Yum! China, Astons, and Soup Spoon. SATS’s plan is to consolidate the Asia-Pacific aviation catering market and the cargo-handling market with their own separate digital platforms.
The group has identified opportunities to serve foodservice chains in both China and India as these fast-casual restaurants have requirements that match SATS’s capabilities in food quality, safety, and processing. SATS is thus in a great position to be a leading central kitchen to these non-aviation customers.
The addressable consumer foodservice market is expected to grow at 4% per year from 2017 to 2023, to S$19.7 billion in China, while in India, it is expected to grow at a faster clip (6% per year) over the same period, to S$1.9 billion. The size of both markets presents many opportunities for SATS to capture some of this growth and convert it to revenue and profit for the group.
2. Capital expenditure of S$1 billion over three years
SATS intends to accelerate its capital spending over the next three years, with proposed capital expenditure and investments of S$1 billion. To put this in perspective, the total amount spent by SATS in the last five years was S$681 million, implying an average capital expenditure of S$136.2 million. The group intends to ramp this up by nearly two and a half times to around S$333 million per year (on average).
CEO Alex Hungate has explained that these will be mostly “bolt-on acquisitions,” as there are no large food catering or central kitchen competitors out there for SATS to acquire. The idea is to consolidate the market over time as the industry is fragmented, even though SATS has a dominant market share. Management has already identified a pipeline of potential acquisitions (which they cannot disclose at this point). However, further due diligence is required to assess if these businesses are worth acquiring — and if they can contribute to the overall group. One example of a rejected acquisition is the deal with Turkish Airlines, as deeper due diligence showed that the numbers were not attractive.
Management is not averse to gearing up for these acquisitions as its balance sheet is currently lightly geared.
The jury is out for now
While these plans do sound exciting, the jury is out as to whether such plans will truly add value for shareholders, as time and resources are needed to assess the acquisitions and also to integrate them into the group’s operations. Execution is also key, and it will be a test of management’s capability to successfully integrate and manage these bolt-on acquisitions.
Investors can look forward to more announcements about SATS’s future plans, but the numbers may also take a short-term hit thanks to the required investments needed to build a stronger overall company.
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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 Royston Yang owns shares in SATS Ltd.