Home Capital In print this week

SATS looks to 'disrupt' travel retailing, forges new ground-handling deals

Michelle Teo
Michelle Teo3/26/2018 08:00 AM GMT+08  • 5 min read
SATS looks to 'disrupt' travel retailing, forges new ground-handling deals
SINGAPORE (Mar 26): SATS has come a long way since it was spun out of the Singapore Airlines group in 2000. It has expanded its core inflight catering and ground-handling business globally and made astute forays into the food business through partnerships
Font Resizer
Share to WhatsappShare to FacebookShare to LinkedInMore Share
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

SINGAPORE (Mar 26): SATS has come a long way since it was spun out of the Singapore Airlines group in 2000. It has expanded its core inflight catering and ground-handling business globally and made astute forays into the food business through partnerships and joint ventures. These include a deal with agribusiness giant Wilmar International to produce and distribute ready-to-eat meals in China. From the perspective of investors, these efforts have been a great success. Over the last five years, shares in SATS have climbed 72%. By comparison, the Straits Times Index was up only 7.6%.

Now, Alex Hungate, who was appointed CEO of SATS on Jan 1, 2014, is setting his sights on turning the company into a technology play of sorts by harnessing the huge amounts of data available to provide more personalised services for people travelling around the world. “Every time we add a new location, we get to provide more to airlines and passengers and shippers in terms of connectivity,” he tells The Edge Singapore. “We’ve already linked some of the systems across Asia for cargo and airport lounge management, so that we can do a better job of recognising customers as they move around, and we can customise and personalise the services better.”

One aspect of this grand plan relates to “disrupting” the travel retail business. In 2016, SATS formed a joint venture with duty free retailer DFASS Group, which provides inflight duty-free and duty-paid sales, mail order and pre-order services, as well as retail services on ground. The JV, called DFASS SATS, was then contracted to operate inflight retail services for the SIA group. However, on March 8, SIA said it would acquire a 70% stake in the JV; SATS and DFASS will hold 15% each.

The plan is for DFASS SATS to convert inflight sales catalogues of SIA and Scoot into “omni-channel e-commerce plaforms”. Essentially, SIA passengers will be able to order products via KrisShop, either mid-flight or before departure, and have them delivered either on board or on ground. “That has a lot of potential because when people travel, they also spend a lot on shopping,” Hungate says.

The way he sees it, airlines have not fully exploited the potential of providing their passengers with a good retailing experience. “This concept of only buy-on-board is restrictive in a number of ways. Inventory is relatively narrow. And, it’s a shame because the passengers are on the journey for quite a long time. [They’re] captive, and in a holiday mood,” Hungate says. “So, it’s an opportunity to give them a service they wouldn’t normally have and make it more convenient for them to use. I think there’s a lot more scope there for it to become a fully e-commerce offering.”

Deals with AirAsia, Turkish Airlines

Meanwhile, SATS is also continuing to expand its ground-handling and inflight catering businesses through JVs with AirAsia and Turkish Airlines. “Our strategy is about connectivity,” Hungate says.

With Turkish Airlines, SATS will invest in a catering company operating out of Istanbul New Airport, which will become one of the largest flight kitchens in the world, serving not just Turkish Airlines but other carriers that operate to and from the Istanbul air hub. The JV with AirAsia, which was inked last October, will see SATS taking over the budget carrier’s ground-handling operations at 15 airports throughout Malaysia, and expanding to Air Asia’s other hubs in Indonesia, Thailand and the Philippines.

Analysts say these latest deals could provide a further boost to SATS’ earnings over the next couple of years. Since FY2015 (the company has a March year-end), earnings have been improving even though turnover growth remains flat. For FY2017, earnings were up 17% y-o-y, while revenue was up only 1.8%. Operating profit had improved 7.4%, while the share of results from associates and JVs jumped nearly 38%.

SATS’ most recent results were not all that inspiring, though. For 3QFY2018 ended Dec 31, the company posted a 4.6% y-o-y decline in core earnings to $62.1 million, excluding a $4.5 million write-back related to its acquisition of an additional stake in MacroAsia Catering Services. Turnover for the quarter amounted to $439.8 million, down slightly from the year before, as the inflight catering business declined, owing to lower revenues from the Japanese flight kitchen. TFK Corp saw weaker meal volumes as one customer — Vietnam Airlines — had switched over to ANA Holdings’ kitchen after ANA acquired a stake in the company, while Delta Air Lines, a large customer, diverted some flights to Shanghai instead.

More upside?

Still, analysts and investors remain positive about SATS’ prospects. On Jan 19, the stock hit a record high of $5.85, which valued the company at over $6.5 billion. The stock has pulled back since then. Even so, SATS is trading more than 10% higher than a year ago.

“Despite pricing pressure from airlines, we see future earnings growth for SATS as it continues to make investments and form new partnerships,” notes Phillip Capital analyst Richard Leow. “SATS is leveraging its core competencies to tap growth in passenger and cargo traffic.” However, with the recent run-up in the stock price, analysts, including Leow, believe the market has already priced in SATS’ growth prospects. SATS is trading at about 23 times forward earnings and 3.3 times its book value.

Leow recently downgraded the stock from a “buy” to a “neutral”, although he raised his price target to $5.33, from $5.23, implying a forward price-to-earnings of 23.3 times. He forecasts that SATS will record earnings growth of 9% to $255 million for FY2018.

Meanwhile, as the arrangements with Turkish Airlines are still being negotiated, following the announcement last October, analysts at OCBC Research prefer to “wait for clarity” before adjusting their estimates. They have a “hold” call on the stock and note in a Feb 14 report: “We believe investors should position themselves to accumulate at better entry levels, closer to $5.05 and lower.”

Loading next article...
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
Subscribe to The Edge Singapore
Get credible investing ideas from our in-depth stock analysis, interviews with key executives, corporate movements coverage and their impact on the market.
© 2022 The Edge Publishing Pte Ltd. All rights reserved.