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SATS Ltd’s Latest Earnings: Growing Pains Amid Macro Headwinds

SATS Ltd (SGX: S58), a leading provider of food solutions and gateway services, announced its Q1 2020 earnings last week for the period 1 April 2019 to 30 June 2019. SATS provides food solutions including airline catering and central kitchen for foodservice chains and corporations. The group is present in over 60 locations and 13 countries across Asia Pacific and Europe.

Overall, it was a mixed picture for the group. Revenue increased while operating and net profit both decreased. While SATS blamed the profit decline on “macro headwinds,” it should also be partially attributed to higher expenses from the consolidation of its Ground Team Red (GTR) unit, which led to an S$20.6 million increase in group expenditure. However, cash flow continues to remain healthy with S$80 million of operating cash flow and capital expenditure of S$10.4 million, resulting in it generating free cash flow of around S$70 million.

Strong operational improvements

If we compare SATS’s operational statistics for Q1 2019 and Q1 2020, we see a noticeable improvement in all the numbers, except for cargo handled. SATS handled 22.5 million passengers in Q1 2020, up from 14.7 million a year ago, and 19.3 million meals were served, up from 18.8 million. As for ground handling, flights handled more than doubled from 40,900 to 91,500. On the flip side, the number of employees also grew by 26% year on year from 13,200 employees to 16,700 employees, resulting in a spike in staff costs.

Continued growth in division revenues

The financial numbers reflect the improvements seen in the operational statistics, with the food solutions business seeing a 0.8% year-on-year growth in revenue to S$241.4 million. Gateway services saw a nearly 12% year-on-year jump in revenue to S$223.3 million. Favourable industry trends underpin the growth of these two divisions, and it is encouraging to see that SATS is able to capitalise on its market-leading position to grow the business further.

Headwinds from US-China tensions

Q1 2020 profit was affected by few events: the suspension of Jet Airways, for one, impacted profit, while lower cargo volume resulting from the US-China global trade tensions also spilt over and led to lower profitability. As these headwinds may not abate anytime soon, investors should be mentally prepared for a rough ride.

Necessary growing pains

As companies grow, most will experience some form of growing pains. Costs may sometimes rise faster than revenue, especially if certain capabilities or competencies are being nurtured within the group. As SATS articulated during its Capital Markets Day, the company is expanding into central kitchens for non-aviation customers and needs to spend on growing this new division. The key is for investors to not fixate on the results from just one quarter, as this may not be an accurate reflection of SATS’s overall growth prospects.

SATS’s strategic execution

SATS has clearly communicated its strategic vision and corporate direction during its inaugural Capital Markets Day. Investors need to keep their eye on the long term as the group builds up its capabilities and executes on its growth strategies. I will be watching its balance sheet and cash flow carefully as it plans to commit to a higher level of capital expenditure over the next three years, principally for “bolt-on” acquisitions. These are exciting times for investors, and a blip in the form of a poor quarterly result should not derail SATS’s planned growth trajectory.

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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.