By Rusmin Ang, co-founder of The Fifth Person
Last year, SATS Limited, one of the largest ground handling and in-flight catering service providers in Singapore, proposed to acquire Singapore Cruise Centre for S$110 million. Singapore Cruise Centre is the operator and manager of three cruise and ferry terminals in Singapore — HarbourFront, Pasir Panjang and Tanah Merah.
Former president and CEO, Tan Chuan Lye, who retired last year said the proposed acquisition “a compelling fit” with the company’s cruise-handling and terminal operations at Marina Bay Cruise Centre. If the acquisition is approved, SATS will monopolize cruise terminal services in Singapore!
However in May this year, SATS abruptly pulled the plug on the proposed acquisition. The Business Times contacted SATS but no information was given. The vendor, Temasek Holdings, didn’t provide any explanations as well.
So why was such an attractive deal called off at the last minute? I went to SATS’ AGM this year to find the answers. So here are…
12 Quick Things I Learned From SATS’ AGM 2014
- SATS dominates around 80% of the in-flight food catering services market share in Changi Airport, Singapore. Beyond that, SATS has key joint ventures with key partners in the region:
- In Japan, SATS has captured around 50% and 40% market share in Narita and Haneda airports respectively.
- In Hong Kong, SATS’ partner has around 30% market share for passenger, ramp and cargo handling services at Hong Kong International Airport.
- In China, a partner has around 60% market share for ground handling services at Beijing Airport.
- At Macau International airport, SATS’ partner is the only in-flight caterer.
- In Taiwan, a partner has 30-40% market share at three airports — Kaoshiung, Songshan and Taoyuan.
- In India, a partner has 67% and 44% market share of at Bengaluru International Airport in Bangalore and Rajiv Gandhi International Airport respectively, and 28% market share at Chennai International Airport.
- In Vietnam, a partner serves close to 75% of airlines operating at Tan Son Nhat International Airport.
- And finally, a partner has close to 70% market share at Ibrahim Nasir International Airport, Maldives.
- SATS chief executive director, Alexander Charles Hungate, in his welcome presentation to shareholders at the beginning of the meeting mentioned: “Since August 2009, SATS’ total return has outperformed the STI by 41%.” That kind of return is infinitely better than parking your money in the bank.
- In 1999, SATS’ revenue was driven solely by the Singapore market. In 2014, 20% of sales are generated from Japan (15%) and other markets (5%). The management plans to further diversify into other Asian countries. In February, SATS strengthened its Indonesian presence by acquiring Cardig Aero Services (CAS) – a gateway services and in-flight caterer. CAS strategically fits SATS’ similar core business and allows the company to gain access to one of Asia’s key markets.
- Despite slowing passenger growth in Singapore Changi Airport, SATS remains positive for the midterm with Terminal 4 coming online in 2018, boosting passenger capacity to 85 million a year. In the longer term, Terminal 5 is expected to be completed in 2025 with Singapore Changi Airport serving 135 million a year by then! Investors should take note that new terminals do not necessarily mean that capacity will be fully utilized when opened. For example, if a recession hits, travel and tourism would fall in general.
- Project Jewel, a mixed-use complex that aims to make Changi Airport an attractive lifestyle destination for long-flight tourists to shop while waiting for their transit, would also help to improve the volume of SATS’ business if executed well.
- SATS handles around 416,000 cruise passengers (out of 1.03 million cruise passengers in Singapore) through Marina Bay Cruise Centre which effectively translates to 40% market share. To date, the contribution from the cruise segment is still insignificant due to seasonal losses during certain months and a low penetration rate for cruise travel among Asians.
- With air traffic growth in Asia Pacific projected to grow at 6.5% annually till 2032, SATS is actively investing in state-of-the-art technology to automate certain work processes to mitigate rising manpower costs (currently 48.8% of total operating costs) and produce better profitability margins. Such a move would cause a shift from higher labor expenses to higher depreciation expenses. However, the management believes that depreciation expenses are more consistent and cost less than labor. Implementation of technology isn’t easy and errors are expected during the process. It might take some time before we see a significant impact in cost savings.
- SATS also plans to strengthen its existing moat by expanding their gateway services (passenger services, apron services and air cargo handling) across multiple airports in Asia. Trade and commerce has been growing rapidly in Asia and gateway services help meet important logistical needs for companies. For example, SATS’ Coolport facility manages and handles cold chains for land, sea and airfreight and is the world’s first Centre of Excellence in Pharmaceutical Handling certified by the International Air Transport Association. After talking intimately to pharmaceutical companies, SATS realized that they wanted an end-to-end service for delivery of vaccines. However the challenge of transporting vaccines is in maintaining an exact temperature range during shipment. A vaccine must be transported at 7-8 degrees Celsius; any temperature outside this range would destroy the vaccine which can be very costly for pharmaceutical companies. SATS’ Coolport highly fits the needs of pharmaceutical companies.
- Similar to my previous post on SIA Engineering, most of SATS’ clients are commercial airlines. As the aviation sector gets more and more competitive, airlines are becoming more and more price sensitive. This puts SATS in a very difficult position to raise prices despite rising labor costs. Nevertheless, after going through multiple recessions and seeing airline after airline filing for bankruptcy, SATS still remains resilient today.
- Sales from Japan declined by 19.8% in 2014 due to rising tensions between China and Japan. The tension discourages travels between the two countries. Coupled with a weakening Yen, its Japan business segment’s poor performance has dragged down SATS’ top-line. Should Japan legalize casino operations by end of the year, along with the 2020 Olympics in Tokyo, the country should receive a welcome boost of tourism and would benefit SATS’ operations there.
- The abortion of the Singapore Cruise Centre deal appears to be a business rather than regulatory decision. Announcements were made by major American cruise companies which emphasized that the future growth of the cruise industry is going to be driven by large ships which are more profitable. According to Alexander Charles Hungate, HarbourFront Cruise Center doesn’t fit these large ships and the deal to acquire Singapore Cruise Centre was subsequently called off. He added there were other reasons why the deal was called off but declined to comment further.
- SATS has been buying back its shares since 2011. From 2011-2012, one million shares were repurchased and an additional one million shares in 2013. In 2014 so far, 5.6 million shares have been repurchased. The total share buyback over the past four years is around 8.6 million shares (out of a total 1.12 billion outstanding shares) though around 5.3 million shares were granted as share options to employees at the same time. The buybacks have so far been executed when the stock ranges around $3/share. Will this trend continue? Your guess will be as good as mine!
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ABOUT THE AUTHOR
Rusmin Ang is an equity investor and the co-founder of the online investment magazine The Fifth Person. He is also the co-creator of The Investment Quadrant, an online multimedia stock investment course where students can learn how to invest profitably in the stock market. Rusmin has been featured multiple times on 938LIVE as a guest expert on MoneyWise and is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur. Rusmin is also the co-author of Value Investing in Growth Companies which is internationally published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple’s iBooks. If you’re interested to learn more about stock investing, you can join The Fifth Person Newsletter and receive free weekly insights on how you can generate higher returns and dividend income from the stock market.
* The opinions expressed in this post are those of the author and do not necessarily represent the views of Business Insider.