The Motley Fool

Better Buy: Singapore Airlines Limited vs. SATS Ltd

The aviation sector is a fertile place for investors to hunt for investment ideas, as the growth of the travel industry is the last decade has been nothing short of astonishing. As the world becomes more globalised, and with air travel costs falling as low-cost airlines enter the space, it has never been a better time for people to travel.

This trend looks set to continue into the next decade as Asia’s rising middle class starts earning sufficient salaries to allow them to afford to bring their families overseas, and in Singapore, tourism has been boosted by travelers from China, India, and Indonesia. Investors who wish to gain exposure to this lucrative industry have several choices: They can invest directly in hotels (which accommodate the tourists), in tourism asset operators (which own tourism assets to attract visitors), or directly in the aviation industry (via airlines, airports, or industries supporting the airlines).

Singapore Airlines Limited (SGX: C6L), or SIA, is Singapore’s flagship carrier, and its business deals with passenger and cargo air transportation. It operates the following segments: Singapore Airlines, Scoot, Silkair, Singapore Airlines Cargo (SIA Cargo), and SIA Engineering Company Ltd (SGX: S59). SATS Ltd (SGX: S58) is a leading provider of food solutions and gateway services to the aviation industry.

Both companies provide exposure to the burgeoning aviation industry, but which is the better buy? Let’s look at three metrics to determine this.

No. 1: Free cash flow

Free-cash-flow (FCF) consistency is the hallmark of a great investment, as investors can rely on a steady stream of excess cash flow generated from operations to boost the company’s cash balance and pay out regular dividends. Looking at the above, it’s clear that SATS has a very consistent pattern of FCF generation, while SIA generated negative FCF in the last four out of five years.

Winner: SATS

No. 2: Return on equity

The return on equity (ROE) tells us the amount of profit the company generates per dollar of share capital, and it’s a measure of the profitability of the business. SATS has consistently generated ROE in excess of 10%, while SIA has struggled to generate ROE above 5%. Airlines are affected by uncontrollable factors such as regulations and oil prices, and this may explain why SIA’s ROE is low — and erratic.

Winner: SATS

No. 3: Dividends

Though both SATS and SIA pay dividends, it’s immediately clear that SATS’s dividend has been steadily increasing over the last five years, while SIA’s dividend has been fluctuating unpredictably. If investors go by the profitability and FCF-generation ability of each company, that explains why SATS has a more consistent dividend while SIA’s is more erratic.

Winner: SATS

The clear winner

It should be obvious by now that SATS is the overall better choice as it was the winner in all metrics. Being able to generate consistent FCF, high ROE, and increasing dividends allows investors to sleep well at night, and it also offers excellent long-term growth opportunities for investors who deploy money into the group. Though SIA possesses strong brand recognition, it is financially unable to generate great numbers. SATS is, therefore, a better choice compared to SIA if an investor wants to gain exposure to the aviation industry.

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The information provided is for general information purposes only and is not intended to be personalized 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.