(Oct 23): Air travel is a cyclical business, and airport services provider SATS has made a remarkable effort to break out of that cycle and reinvent itself as a play on the urbanisation of the middle class in Asia.

For that, it has emerged as the best-performing stock in the services sector. The sector comprises companies in assorted industries — from water treatment firms CITIC Envirotech and SIIC Environment Holdings to healthcare providers Raffles Medical Group and IHH Healthcare and casino operator Genting Singapore.

SATS was spun out of the Singapore Airlines group in September 2009. The company has expanded out of Changi Airport and, leveraging its existing infrastructure capabilities, diversified into adjacent businesses that have boosted its earnings even as revenue growth slowed.

In 2010, it acquired a major stake in Japan’s TFK Corp, which operates the in-flight catering kitchens at Tokyo’s airports. The following year, it formed a consortium with Spain’s Creuers del Port de Barcelona to manage the Marina Bay Cruise Centre and build a new business segment: fly-cruise passengers.

When growth in air travel sagged in the wake of the global financial crisis, SATS’ ground handling and in-flight catering businesses were affected. Leveraging the efficiency and scale of its flight kitchens, the company diversified into the business of supplying meals to institutions such as hospitals. Later, the company scaled up its food business through a joint venture with BRF, a Brazilian meat processor and distributor and the seventh-largest food company in the world by revenue. Last year, it established JVs with food and agribusiness giant Wilmar International to set up central kitchens to supply safe food to China.

In 2010, it invested $16.5 million to build a high-tech, temperature-controlled e-commerce logistics facility, Coolport, dedicated to the handling of perishable cargo — everything from pharmaceuticals to flowers and shrimp. It capitalises on SATS’ existing capabilities in freight handling, as well as Singapore’s location as a transshipment hub, and the broader global trend of rising middle-class consumption of higher-quality goods. In April this year, Coolport secured the European Union’s approval to handle transshipments of meat from New Zealand bound for the continent.

Meanwhile, SATS has invested in automation and other technological innovations — from robotic arms that assemble airline meal trays to augmented-reality smart glasses used in its ramp-handling operations. As Changi Airport’s Terminal 4 opens and the industry gears up for the mega Terminal 5, Singapore is expected to cater to some 50 million passengers by the mid- 2020s. At the same time, air travel growth in and around Asia-Pacific is fuelling similar expansion programmes at neighbouring airports. As such, SATS’ initiatives are not just about boosting productivity and profit margins but also about securing new business opportunities. SATS’ earnings have grown at a compound rate of more than 6% annually over the last three years. For FY2017 ended March, it reported underlying earnings of $234.3 million, up 7.4% y-o-y, on the back of $1.7 billion in revenue. For 1QFY2018, underlying earnings increased 3.2%

SATS’ earnings have grown at a compound rate of more than 6% annually over the last three years. For FY2017 ended March, it reported underlying earnings of $234.3 million, up 7.4% y-o-y, on the back of $1.7 billion in revenue. For 1QFY2018, underlying earnings increased 3.2% y-o-y to $57.3 million. Turnover was flattish at $426.5 million. The company has also been consistently generating free cash flow of more than $200 million annually.

The market has changed its mind about SATS being a staid dividend-paying stock and is betting on it for growth. Shares in the company have risen at a compound annual rate of 22% over the last three years, consistently outperforming the benchmark index and earning it the accolade of best-performing stock in the sector with the highest returns to shareholders over the last three years.

Highest ROE
Silverlake Axis, which provides software and digital services to the financial services industry, has topped the services sector in terms of return on equity. However, the company’s latest full-year results have shown some weakness.

For FY2017 ended June 30, Silverlake’s earnings jumped more than 200% y-o-y to RM846 million ($272.2 million). That was largely due to a gain of RM480.4 million from the disposal of its shares in Global Infotech Co, a financial information software provider. Excluding exceptional items, Silverlake would have reported a 40% decline in earnings to RM160.7 million. Turnover was 20% lower at RM506.4 million. The company has attributed its poorer performance to a slowdown in IT capital expenditure by its customers amid economic uncertainty in the region.

Still, the company says it has seen an improvement in demand for software projects, particularly in the area of digital banking. In June, it secured a contract with “a leading Asean bank”, an existing customer, to implement its banking infrastructure system. The work is to be done over nine months, and the company expects it to contribute positively to its FY2018 results.

In addition, it says the gains from the reduction of its stake in Global Infotech should be repatriated from China in the current financial year. The exercise has raised RM502.8 million in net proceeds, and Silverlake will deploy that towards acquisitions in fintech and insuretech software products and services, as well as payments of special dividends.

Water treatment continues to score
CITIC Envirotech has emerged as the fastest-growing company, after registering the highest growth in earnings over the last three years. The company was formed following the $1.2 billion buyout of water treatment company United Envirotech by Chinese conglomerate CITIC and private-equity firm KKR & Co in 2014. It specialises in membrane-based technology for use in the treatment of water and wastewater. Its subsidiary, Memstar, manufactures hollow fibre membranes. CITIC Envirotech also designs and builds treatment facilities that use the membranes. It bills itself as one of the market leaders in the industrial wastewater treatment sector in China. It says it is taking advantage of growing demand for river restoration, sludge and hazardous waste management, and integrated environmental services within industrial parks, to expand into new business segments. For FY2016, CITIC Envirotech’s earnings nearly doubled y-o-y to $102 million. Turnover was up 62% to $544.6 million, driven by strong growth in the engineering segment. Membrane sales, however, have been sliding. In FY2016, they were 21.6% lower y-o-y.

For 1HFY2017, the company reported a 12.7% increase in earnings y-o-y to $40 million. Turnover was up 3.6% y-o-y to $248.1 million, again driven by the engineering segment. Membrane sales during the six months fell 45% y-o-y to $21.5 million.

Last month, the company said it had secured a project to treat hazardous waste in Binzhou city, Shandong province, China. The city is highly industrialised, with chemical, petrochemical, leather, textile, electrolytic aluminium, iron and steel industries. The project, worth RMB315 million ($64.8 million), involves CITIC Envirotech paying RMB55 million for a company that owns the licences and land required to build a hazardous waste treatment facility. CITIC Envirotech will invest another RMB260 million to build the facility.

Healthcare players
Among the healthcare services providers, Raffles Medical Group scored well in terms of share price appreciation. Indeed, the healthcare sector has seen a robust run over the last year as investors eye growth coming from the twin drivers of an ageing population and rising incomes in the region.

However, Raffles Medical’s earnings have been under strain, owing to significant capital expenditure and start-up losses related to the group’s expansion into China. It is building two hospitals there and extending its existing hospital here. Some analysts say the start-up losses could reduce the group’s pre-tax earnings by as much as one-third. Analysts also expect cost pressures to persist over the next two to three years, and some are doubtful of the prospects of the Chinese hospitals.

For the six months to June 30, Raffles Medical reported earnings of $32.3 million — marginally higher than the year before. Turnover was down slightly at $235 million. In FY2016, earnings were up 1.3% y-o-y to $70.2 million, while turnover rose 15.4% to $473.6 million.