Wednesday, June 27, 2012


SATS, Singapore Airport Terminal Service, "is the leading provider of gateway services and food solutions in the region". As stated by the description, SATS's 2 core businesses are in the Gateway and Food industry contributing 31.9% and 67.5% respectively. As majority of the food solution are meant for air passenger, aviation accounted for 59.8% of total revenue which means it is highly correlated with the travel and tourism industry in Singapore.

Figure 1 - Segmental Revenue 

Figure 2 - 5-Years Result Summary

I have compiled the more important numbers in figure 2 and we can see that revenue has nearly doubled over the past 5 years. However, do take note that it has also been driven by acquisition of new business. They acquired SFI in 2009 which contributed 2 months of revenue worth $110m in 2009 before making a full contribution in 2010. In 2011, they acquired 50.7% of TFK which contributed $73m in revenue for 3 months. 

Despite the increase in revenue, it has been noticed that net profit attributable to shareholder has not increased much since 2008. If you take in account that there is a $17m in exceptional item in 2008, then we will have seen a 10% increase in profit over the years as compared to 75% increase in revenue,

Profit margin has dropped sharply since 2009 from a high of 20% to 9.1% currently as a  result of the acquisition of SFI. So is the acquisition of SFI a bad move given that profit margin drops by such a huge amount? Looking at SFI's profit margin before it is being acquired, it is at a figure of around 4-5%. However, this certainly does not imply that it is a bad acquisition. If you were to look at the ROA and ROE, you will have only noticed a slight dip which goes to show that SFI have a high turnover and hence ROE.

In fact, things will have been much better without the consolidation of TFK in 2011 which contributed $73 m in revenue but $74.2m in operating expense, implying an operating loss of $1.2m. Paying $122m for operating loss of $1.2m, it is again not necessarily a bad investment. TFK has been unduly affected by the disaster in March 2011 which resulted in 11 of its airline customers suspending or diverting flight as well as a disruption to raw materials supply. When TFK starts to turnaround, we are going to see significant improvement to the bottom line. In 2010, TFK recorded a revenue of $353m and $27m in EBITDA on total equity of around $180m. 

With regard to the cashflow statement, FCF/Net Profit is at an average of around 90% ranging from 70% to 105%. SATS is not as capital intensive as 60% of the PPE are in leasehold building and land. However, capex has increased rather significantly after the acquisition of SFI though it is still able to generate a pretty healthy FCF.
Figure 3 - Segmental Result

The segmental result shows that the Gateway services is much more profitable as compared to Food solution. Of course, we have to make some adjustment here as the share of profit from associated/ joint venture companies does not contribute to the revenue. ROA for Food Solution is around 7.4% and 10% for Gateway Services. It seemed like the company has been doing while with its investment in associate as we see a ROI of 20%. Gateway Services has a higher profitability as it is more of a service provider unlike the Food Solution where cost of food is involved. Should there be a rapid rise in food prices, expect profitability to be hit.


For its Gateway and Aviation food services in Singapore, SATS is the clear market leader with DNATA being the only competitor. DNATA is owned by Emirate (wholly owned by the Government of Dubai) which helps it to secure contract with Emirate and other airlines. For Gateway, operators need to secure a license from the Changi Airport Group which has currently issued 3 licenses. SATS has a market share of 74% in this area with DNATA having the other 26% of the pie. ASIG, the 3rd licensee, has not been able to secure any business after 1 year of securing the license. In 2004, Swissport got a license to operate but exited within 3.5 years with $15m losses. As such, SATS has a rather strong grip in its market share and is poised to benefit from growth in traffic of Changi Airport Group. One possible risk is that as it is no longer linked to SIA, its chance of losing SIA's contract is slightly higher now.

In terms of aviation food solution, SATS has a market share of 86% as compared to 14% for DNATA. In this area, SATS get to benefit from its economies of scale as it delivers up to 80,000 meals a day through its central kitchen. SIA requires an average of 30-45m meals a day which there is no one in the market with the equipment and expertise to deliver presently.

For its non-aviation related food solution in SFI, around 30% of the revenue comes from military cook-house contract. It is not a monopoly though as NTUC FoodFare is also involved in the catering of food. However, I am pretty sure it is a monopoly in terms of the outfield ration as I always see the same green pack and accessory pack when I went outfield. SFi is also involved in the food distribution business with brands like Farmpride and Singourmet.

SFI has an excellent segment in Abattoir operation as it is the only one in Singapore licensed to provide pig slaughtering services. To understand its profitability, look at similar business in Elite KSB's chicken slaughtering business. They also conduct the Hog Auction market which conducts daily auction of live pigs. As a result, the revenue is highly correlated with the number of pigs imported into Singapore. ROA for this segment is as high as 30% though it only accounts for 15-20% of SFI's net profit.

Cyclical or Recession Proof?

Figure 4 - Operating Statistics

Figure 5 - Passenger Traffic

As shown earlier in Figure 1 that 40% of revenue are non-aviation, this part is likely to be a recession-proof business since a huge portion are from 5-years military contract as well as abattoir operation. As for the other 60% of the revenue, we will need to take a look at figure 4 and figure 5.

Changi Airport Group has shown strong growth in passenger traffic over the past 6 years and has proven its resilience in 2009. Do note that International Visitor accounts for around 50-60% of the total traffic which means that Singaporean accounts for the other 40-50% of it. Theoretically, for every international visitor that arrive, they will also have to leave which means by doubling the international visitor figure you will get their contribution to passenger traffic. Local passenger traffic seemed rather stable with most of the growth coming from international visitor. This has spiked up since 2010 with Formula 1 and our 2 Integrated Resorts.

If we look at figure 4, we can see similar growth and stability in most of the operating metrics other than in Cargo & Mail Handled as well as Inflight Meals Produced which shows an estimated 10% decrease in FY 2010. This does prove that the business of SATS is fairly resilient in a recession. The drop in Inflight Meal though Flights handled increases seemed to imply that that it has undertaken more budget airline business. However, I believe a similar crisis like SARS will still be able to hurt its top and bottom line greatly.

Figure 6 - Share of Result of Associate

While SATS has performed rather well, its associate seemed to get hurt much more during a recession, dropping by nearly 60% in 2009 from its high in 2007. SGD 30 million will be equivalent to around 15% of its net profit. Do take into account that this will also be negatively affected if Sing dollar continues to strengthen.

Therefore, it is likely to be hit by the greatest extent from its associate companies in a recession. Other than a SARS-like event occurring, profit should drop by around 20% (5% from themselves and 15% from associate) during the downturn. With free cash flow/ net profit at a decent percentage, it will not be hard for SATS to maintain a 70% dividend payout ratio throughout the business cycle.


  1. Many thanks for the thorough analysis.

    I will look out for SATS, and do some homework on it.

    Seem like an interesting stock.

    Check out my blog, SG Web Reviews (

    Thank you.

    1. something which I have noticed is that the current CEO seemed to be looking at a growth through acquisition method instead of seeking organic growth. For the Marina Cruise, they have stated that revenue is highly unlikely to exceed $10m for the 1st four years in operation.

  2. Thanks for the great analysis.

    I'm curious how you get the financials for TFK?
    "In 2010, TFK recorded a revenue of $900m and $27m in EBITDA on total equity of around $180m. "

    Where did you find it? I can't seemed to find in SATS annual report.

    1. Hi, pg 62 of the annual report for 2010-2011.

      Revenue of TFK = 1168-1095.4=
      Expenditure: 74.2 million$file/Completion-of-Acquisition-TFK-PressRelease.pdf?openelement

      For the 2010 figure, just realised that I recorded the wrong revenue, should have been $353 million

    2. Thanks for clarifying. That certainly lowers the returns of TFK. Brillant analysis BTW.

  3. you, at the age of 20 have written such an excellent write-up. as i understand from this blog, your knowledge were attained from reading books.

    great job, young lad! you have inspired me, an uncle, to start reading up more.

    good luck for your studies and future investments.


    1. Thank you. it has always been my belief that the best investment an investor can make is to invest in his own education and knowledge