It posts net profit of S$65 million as revenue rises to S$1.4 billion, up 15.5 per cent

 

Sats on Tuesday (Aug 20) posted a net profit of S$65 million for the first quarter ended Jun 30, 2024, from a loss of S$29.9 million over the same period a year earlier.

 

This came as revenue for the period rose to S$1.4 billion, up 15.5 per cent from the S$1.2 billion it posted a year earlier.

 

In its Q1 business update, the company attributed this to the growth in revenue from both its gateway services and food solutions businesses.

 

Revenue for its gateway services segment grew 12 per cent year-on-year to S$1.1 billion on an increase in air cargo volume from high-tech shipments, growth in e-commerce demand and the shift from ocean freight due to the crisis in the Red Sea.

 

Meanwhile, its food solutions segment&rsquo s revenue grew 29.3 per cent to S$310.8 million as inflight meal demand rose.

 

As revenue scaled up, the company also realised operational efficiencies, which led operating profit margin to improve from 0.7 per cent to 8.2 per cent. Operating profit for the quarter stood at S$112.9 million.

 

Sats to partner Japan&rsquo s Mitsui in expanding its food solutions business

 

In the coming quarters, Sats expects to maintain its positive momentum.

 

&ldquo The acceleration of e-commerce, the shift to air cargo because of seaport congestion, and disruption in maritime shipping are expected to continue to underpin demand for air cargo services,&rdquo the company said.

It says disruptions in the global supply chain have amplified the rise in materials pricing while construction and labour costs surge on inflationary pressures

 

SATS : S58 +0.99% has decided not to proceed with the development of a food hub on a site in the Jurong Innovation District, two years after a high-profile ground-breaking ceremony in April 2022.

 

Announcing the decision last month, Sats pointed out that disruptions in the global supply chain have amplified the rise in costs of materials and escalating inflationary pressures have driven up construction and labour costs.

 

The five-storey building called Sats Food Hub was originally slated for completion in 2024, complete with facilities for food manufacturing and production kitchens. There were also plans for an innovation lab, a warehousing and logistics centre, a food court and an experiential centre.

 

The ground handler and caterer has an institutional catering business with customers including hospitals, care facilities, pre-schools and student care centres. The plan was for its institutional catering businesses at several JTC-leased premises located at Pandan Loop to transfer to the Sats Food Hub.

 

The total development costs for the food hub, including equipment, was projected to be S$150 million. The estimated lease cost was about S$42.6 million for 30 years and the tenure had begun in 2022.

 

In its update, Sats did not disclose details on the magnitude of the surge in construction and labour costs. Neither was there any mention of compensation paid for breaking the 30-year lease of the Jurong site.

 

However, the company did say that the move is not expected to have a material impact on the consolidated net tangible assets and earnings per share of the inflight catering and ground handling group for the financial year to March 2025.

 

It is probable that the Sats Food Hub vision is still on the mainboard-listed player&rsquo s radar though, as Sats said that it is evaluating identified sites as alternative locations for the proposed hub.

 

While no details have been given on the alternatives, an educated guess is that this option will save the budget-conscious Sats a considerable sum in construction costs if an existing facility is leased, rather than built from scratch.

 

Sats to partner Japan&rsquo s Mitsui in expanding its food solutions business

 

The Building and Construction Authority data showed that tender prices jumped by 32.4 per cent between 2020 and 2023, or up 13.9 per cent year on year in 2021, 11.6 per cent in 2022 and 4.1 per cent in 2023.

 

When Sats decided on the construction of its food hub, it probably did not expect that cost would escalate a further 16 per cent.

 

The decision on the food hub project also probably preceded Sats&rsquo acquisition of air cargo handler Worldwide Flight Services (WFS), which was announced in September 2022 and completed in April 2023.

 

The acquisition saddled Sats with a high debt level as it was made at an enterprise value of 2.3 billion euros (S$3.4 billion) including WFS&rsquo 1.1 billion euros of bonds.

 

Sats&rsquo net debt to equity rocketed to 1.3 times after acquisition as at end-FY2024 to March, over three times of FY2023&rsquo s 0.4 times.

 

Sats had free cash flow of S$326.5 million for FY2024, but the net cash from operating activities less cash purchases of capital expenditure would be a negative S$48.2 million if lease payments are taken into account.

 

Another factor is the relative importance of inflight and institutional catering to the entire business.

 

While Sats is in the business of food manufacturing and supplying, the proportion that this segment, which includes inflight and institutional catering, contributes to total revenue has shrunk. It has dropped to 21.5 per cent in FY2024 from 49.4 per cent in FY2023. Ground handling and cargo handling account for most of the other contributions.

 

On the profitability front, Sats&rsquo food business is also turning out to be less lucrative. In FY2024, the operating profit margin from food solutions was 2.5 per cent, compared with 6.2 per cent from ground handling and cargo handling.

 

Overall, looking at the split between aviation and non-aviation, the contribution to total revenue from non-aviation operations decreased to 8.6 per cent in FY2024 from 26.8 per cent the year before.

 

At the time Sats held its food hub ground-breaking, it expected non-travel business to account for 35 per cent of total revenue by 2025 after the ground handler and inflight caterer turned its focus to the non-travel-related food business when the pandemic hit in 2020.

 

Sats offered no breakdown of aviation and non-aviation food solutions contributions but it is now likely to be generating a smaller proportion of its revenue from non-aviation food business as aviation recovers and air cargo has ramped up.

 

The growth prospects for aviation are likely to be stronger than for the food business, which is largely domestic focused.

 

Given its current gearing and business focus, Sats has taken a prudent decision, indeed, not to proceed with the food hub construction and explore more cost-efficient options.

 

SINGAPORE - What a difference a couple of years make.

 

Two years ago, aviation and airport services specialist Sats was panned by analysts and investors after it announced plans to buy its much larger global rival Worldwide Flight Services (WFS).

 

The 2022 $1.8 billion deal saw Sats take on huge loans, issue new shares and use up much of its cash. The company raised some $800 million from a renounceable rights issue, thus diluting the stock and sending it plunging it to half its lofty levels of around $5 prior to the Covid-19 pandemic.

 

Sats also took a three-year euro-denominated loan for about $700 million, and used its own cash for the balance.

 

Despite the fact that the acquisition would create a global air cargo and service giant with ground handling stations in more than 20 countries, critics panned the takeover as a highly risky move, given that many other global mergers and acquisitions &ndash including the Chrysler/Daimler, eBay/Skype, Nokia/Google and others &ndash had failed. The fear was that Sats was biting off more than it would be able to chew.

 

They got it wrong.

 

Today, Sats is the world&rsquo s largest air cargo operator, controlling a network of more than 200 cargo nodes spanning America, Europe and the Asia-Pacific. It also increasingly dominates the space for aviation passenger, food and ground services.

 

According to Sats chief executive Kerry Mok, the integration of Sats and WFS has progressed more smoothly and quickly than anticipated.

 

The management structure has been reshaped and smoothened out, with senior executives of both companies operating side by side to advance the interest of the enlarged global entity across all businesses and geographies.

 

In business, as in life, timing is everything.

 

Not only did Sats acquire WFS and successfully integrate it, it did so just as global aviation was taking off strongly after the pandemic. As the deal was completed in April 2023, global supply chains were stretched and &ldquo revenge travel&rdquo was furiously taking off. Demand for air cargo services and seats shot through the roof. Since then, global air travel and air cargo numbers have surpassed pre-pandemic levels and hit record levels.

 

The results showed in Sats&rsquo latest full-year numbers.

 

Sats&rsquo net profit for the year to end-March 2024 came in at $56.4 million, a turnaround from a loss of $26.5 million a year earlier, and beating analysts&rsquo consensus expectations by 14 per cent.

 

Revenue almost trebled to $5.15 billion from $1.76 billion. The company also resumed dividend payment, declaring a final dividend of 1.5 cents per share. It paid no dividend the previous year.

 

Analysts note that the results would have been even better if not for about $19 million in foreign exchange translation losses.

 

Sats&rsquo growth continues as the aviation operating environment continues to boom.

 

The International Air Transport Association (Iata) recently released data for May 2024 global air cargo markets showing continuing strong annual growth in demand. Total demand, measured in cargo tonne-kilometres, rose by 14.7 per cent compared with May 2023 levels, marking the sixth consecutive month of double-digit year-on-year growth.

 

Much of this is being driven by global trade growth, booming e-commerce and capacity constraints on maritime shipping in places like the Suez and Panama canals. But interestingly, the surge in air cargo traffic has also exceeded the growth seen in trade and production metrics, which suggests that although trade and production numbers may be steady, more and more goods are being shipped by air.

 

Meanwhile, on the passenger side, air travel numbers continue to soar. As at February 2024, global revenue passenger kilometres (RPK) had surpassed pre-2019 levels.

 

The latest Iata numbers show passenger demand was up 10.7 per cent year on year in May and global RPK is expected to grow 11.6 per cent as total passenger numbers soar.

 

Passenger traffic growth is also driving inflight catering numbers. Sats does both in-flight catering and produces non-aviation meals &ndash both frozen foods and ready to eat.

 

The number of inflight meals provided by Sats surged by 41.5 per cent in 2023, while non-aviation meals grew 12 per cent. Overall, Sats&rsquo Food Solutions revenue grew 27.4 per cent to $1.1 billion for the financial year just ended. The numbers for 2024 are expected to be even stronger.

 

Sats last week announced an expansion of its existing partnership with Mitsui into their food and retail solutions businesses. The Japanese company will acquire a 15 per cent stake in this partnership for $36.4 million, which will support the growth and expansion of Sats Food Solutions India, Sats Food Solutions Thailand, Sats Tianjin and Country Foods.

 

Sats&rsquo highest revenue before its WFS acquisition would probably have been for the year ended March 2020, just as a pandemic hit. Analysts reckon that if not for the pandemic, annual revenue for year ended March 2021 would have been in the region of $2 billion.

 

The bounce-back has been remarkable. For the six months to March 2024, with the integration of WFS taken into account, revenue was already at $2.7 billion. The next six months to September 2024 is expected to be much higher. 

 

Just as timing matters, in this business, size matters as well.

 

Today, Sats is the world&rsquo s biggest air cargo handler and leading ground services provider. And, being the world&rsquo s biggest, Sats can always sacrifice margin for more revenue. Or it can decide to focus more on profitability. Either way, its dominance gives the company options to make more money. 

 

Management appears confident that Sats can increase revenue by about 60 per cent to $8 billion by 2028. This would further cement its position as the undisputed global leader in air cargo and aviation services.

 

But here is the thing. There is no other company listed in Singapore that can claim it is the &ldquo world&rsquo s biggest&rdquo in any trade.

 

Having figuratively made it through the crucible, Sats is firing on all cylinders now. Its stock price has performed well over the past month. But it is still cheap for a global leader. While the company is almost three times bigger than it was in 2019, its stock is trading at less than two-thirds its price compared with four years ago.

 

ST understands that analysts who recently upgraded the stock with year-end target prices ranging from $3.20 to $3.60 are currently looking at rerating the stock as the operating environment continues to boom.

 

Despite its gains, Sats&rsquo stock has been somewhat of a laggard in 2024 compared with other Singapore-listed blue chips and marquee names. But judging by the stock&rsquo s movement in recent weeks, the smart money could be starting to wake up to Sats&rsquo potential.