SATS may still be best known as an inflight caterer and ground-handler, but it is well on its way to developing a brand new image as its efforts to expand its non-travel-related businesses bear fruit. The segment is now nearly neck and neck with the travel-related segment in terms of contributions to Sats' s revenue pie.

 

The mainboard-listed company had last week released some business updates for Q1 FY2022.

 

Revenue from non-travel-related business was up 22.6 per cent at S$127.6 million, the company said, making up 46.3 per cent of its top line for the first quarter ended June.

 

Granted, the large contribution of this business segment probably has much to do with the dearth of travel-related business for Sats.

 

Global air traffic is still very much restricted, even though some countries have begun to open their borders to tourists.

 

In FY2021, the non-travel-related business segment had contributed an even larger 48.7 per cent of total topline.

 

But Sats shareholders should also celebrate the growth their company has managed to achieve in this segment, which is a relatively competitive one.

 

For FY2021, the non-travel-related business recorded growth of 38 per cent year on year.

 

Sats' s non-travel-business is largely made up of food solutions. These are commercial catering, institutional catering, and sourcing and distribution. The latter two are the main revenue streams, contributing collectively 99 per cent of non-travel-related food solutions revenue.

 

Security services rendered to non-travel industries make up a very small portion of Sats' s non-travel-related business.

 

Chief executive Alex Hungate said in the company' s recent earnings call that Sats could reach a 50-50 balance between travel and non-travel-related revenue in the medium term.

 

" We' re not sitting around waiting for aviation to recover. We' re driving growth in the non-travel-related business in the meantime, and continuing to get good traction," he said.

 

Sats has demonstrated its focus with several investments.

 

It recently acquired a majority stake in a frozen food producer in Thailand that will be able to churn out 90,000 ready-to-eat meals per day for exports.

 

It is also establishing a central kitchen in India that could produce up to 170,000 ready-to-eat meals per day when operational in 2022.

 

The diversification into non-travel-related food has been underway for some time, and it only looks particularly prescient now that Covid-19 has decimated the travel industry. When Sats first embarked on this journey, the company would not have guessed the extent of its usefulness.

 

But Sats also offers a valuable lesson for companies on how to go about diversification in a steady yet meaningful manner.

 

Sats had elected to diversify more aggressively into food solutions because this business had significant overlap with its existing operations.

 

It was already a supplier of airline meals, so it knew something about how to produce food in large quantities. It also understood what types of meals could be prepared in advance for reheating later, and it had an efficient logistics operation to source ingredients for its meals and then distribute them.

 

The company has parlayed all that know-how into its catering operations, and is now also using it to select acquisitions that fit with its existing operations and align with its DNA.

 

Sats is not quite a pandemic winner. It is currently profitable, but that has more to do with the support it has received from the government to keep its staff in employment. The continued growth of its business does, however, give an indication of the capabilities of its management team in getting through a difficult period.

It posted a net profit of S$6.4m for the three months to June 30, reversing from a loss of S$43.7m previously

IN the early days of the Covid-19 pandemic, ground-handler and in-flight caterer Sats was the beneficiary of generous government dole-outs in the forms of wage subsidies through the Jobs Support Scheme (JSS).

 

One year later, chief executive Alex Hungate said he expects these government grants to be " substantially reduced" for FY2022 ending March 2022, but the company will focus on reshaping its cost base and building new capabilities to support future growth.

 

In a call with reporters and analysts to discuss the company' s financial results for Q1 ended June, Mr Hungate said the grants for the current fiscal year could be as much as half that of last year' s. He added, however, that he is unable to accurately estimate the exact amount.

 

" We will still see grants for the next three (fiscal) quarters, albeit on a declining basis," he said, adding that he hopes support for the aviation sector will continue as the pandemic stretches on.

 

For the first fiscal quarter ended June 30, Sats posted net profit of S$6.4 million. It had posted a loss of S$43.7 million in the corresponding quarter last year. Excluding the government reliefs, however, the group would have booked a loss of S$35 million for the quarter under review.

 

The pandemic has stalled air travel around the world, which theoretically means less business and revenue for Sats. But Mr Hungate stressed the company is " not waiting for the aviation sector to recover" , but tapping on opportunities in non-travel related segments instead.

 

For Q1, Sats' revenue grew 31.6 per cent year on year (yoy) to S$275.6 million. Non-travel-related revenue grew 22.6 per cent to S$127.6 million, or about 46.3 per cent of total revenue.

 

Travel-related revenue, meanwhile, rose 41.9 per cent to S$146.7 million, or about 53.2 per cent of total revenue. The remaining 0.5 per cent or S$1.3 million of revenue is from the group' s others segment.

 

Mr Hungate believes Sats is likely to reach a 50-50 distribution between travel and non-travel revenue contributions soon.

 

The group' s operating expenditure increased 10.9 per cent yoy to S$272.1 million, due partly to higher staff costs as additional safety measures were implemented at Changi Airport. The cost of raw materials and licence fees also rose in line with higher revenue.

 

As countries around the world deal with a rising number of cases and renewed waves of infections, Mr Hungate believes the company' s non-travel-related business could be a lifeline.

 

One example is the group' s recent acquisition of an 85 per cent stake in Food City in Thailand, whose main asset is a food production facility in Pathumthani, Thailand. The acquisition is set to increase the company' s scale for frozen food production for its customers across various sectors.

 

The transaction is expected to be officially completed in the next few months, said Mr Hungate.

 

But some non-travel business segments have lower margins than the travel business. Mr Hungate estimates that margins for the food segment in the non-travel category are currently not in the double digits, but is fairly confident that a high-single-digit margin can be achieved by ramping up the scale of business.

 

Although the outlook for the aviation industry is uncertain, he is quick to say that Sats is not shying away from more acquisitions that will help the company diversify its offerings. Sats is still looking for opportunities, particularly in cargo terminal operations in the larger hubs around the region or central kitchens.

 

" It' s a good time to look for assets which are undervalued," he said. " It could be that airlines are restructuring, so these assets become available."

 

GROUND-HANDLER and in-flight caterer Sats on Thursday posted a net profit of S$800,000 for the fourth quarter ended March 31, up from a net loss of S$6.3 million the previous year due to revenue growth from non-travel related businesses.

 

This works out to an earnings per share of 0.1 Singapore cent for the quarter, compared with a loss per share of 0.6 cent the previous year.

 

Excluding one-off impairments, the group posted a core profit after tax and minority interests (Patmi) of S$13.2 million for the fourth quarter. Without relief from governments, group Patmi would have been a loss of S$45.4 million.

 

Revenue for the quarter fell 35.7 per cent to S$278.5 million year on year, dragged by its gateway services and food-solutions segments.

 

" The group' s performance for the quarter was impacted as low aviation volumes persisted due to heightened travel restrictions amid the ongoing Covid-19 pandemic," it said in a statement.

 

Gateway services' revenue declined 32.4 per cent to S$125.2 million food solutions' revenue dipped 37.4 per cent to S$154.7 million for the quarter.

 

The sharp decline in aviation revenue was, however, mitigated by the expansion into security services beyond aviation and resumption of safe cruises in Singapore.

 

Operating profit for the group in the fourth quarter fell 45.8 per cent year on year to S$22.5 million. Without relief from governments, the group would have posted an operating loss of S$28.7 million.

 

Group expenditure sank 34.6 per cent to S$256 million, compared with the same period the previous year. Staff costs fell $74.1 million, mainly due to reduced number of staff, contract services, overtime and other variable staff costs, along with government reliefs.

 

Share of results from associates and joint ventures improved, registering a loss of S$7.3 million, an improvement from a loss of S$31.2 million in the corresponding quarter of the year before.

 

For the full year, the group swung into a net loss of S$78.9 million from a net profit of S$168.4 million the previous year. Full-year loss per share stood at 7.1 cents versus earnings per share of 15.1 cents last year.

 

No final dividend was declared in a bid to " preserve more jobs and capabilities" , to support its customers as aviation volume resumes and to pursue opportunities outside of aviation, said Sats.

 

Excluding one-off impairments made in the current financial year, the group' s core Patmi would have registered a net loss of S$23.9 million. Without relief from governments, group Patmi would have been a loss of S$320.8 million.

 

Full-year revenue dipped by half to S$970 million, compared with S$1.94 billion the previous year due to the steep fall in demand for air travel as a result of strict border restrictions since the onset of the pandemic.

 

Said Alex Hungate, president and chief executive officer of Sats in a statement: " While the pandemic continues to restrict travel, Sats will continue to transform by reshaping our aviation services businesses while expanding non-travel related businesses."