Sky’s the limit as Sats goes global

Mitsui acquired a 15% stake, equivalent to a $36.4 million investment, in Sats’ food solutions operations in India, Thailand and Tianjin in China, as well as in its food distribution subsidiary, Country Foods.

The Edge Singapore was invited to tour Sats TFK’s kitchen in Tokyo.

The facility, conveniently located next to Narita Airport, can produce up to 40,000 meals daily and is one of the group’s three facilities in the greater Tokyo area.

The facility also comes equipped with Muis-certified Halal kitchens.

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Along with a press conference held by the top brass from Sats and Mitsui’s retail business unit, a food-tasting session was held, where both Japanese and Singapore cuisine were served.

All dishes presented were cooked at the facility, with the laksa and miso-steamed cod particularly impressing the media and executives.

Microwaveable ready-to-eat meals, popular in the heat of Tokyo’s summer, are also distributed by the kitchen after being put on ice in one of the facility’s many deep-freezers, which can handle 10,000 meals at a time.

See also: SIA and Sats on two different trajectories following the post-pandemic boom

Sats’ strength in the partnership lies in its comprehensive capabilities across the food production value chain.

On the other hand, Mitsui will capitalise on its robust distribution network in Japan, which includes joint ventures with 7-Eleven in Japan, China, and the US through its parent company, Seven & i Holdings.

Hurt by the pandemic

The joint venture is not Sats’ first partnership.

The ground handler, whose roots are tied to Singapore’s aviation history, began drawing up its current plans following the Covid-19 pandemic.

In FY2020/2021 ended March 2021, the group posted a net loss of $78.9 million.

The loss would have been $320.8 million had it not been for a $271.8 million injection from the government in grants and reliefs.

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Right before the pandemic, 80% of Sats’ regional business came from Singapore, with its Food Solutions business making up 55% of revenue.

In comparison, 34% came from ground handling and 11% from cargo handling, constituting the Gateway Services segment.

As Singapore and the rest of the world descended into a lockdown, the group fell into the red as flights ceased.

According to data platform Statista, for the week starting Dec 21, 2020, the number of scheduled flights in Singapore fell 89.1% compared to the same week in December 2019.

“The past year was not business as usual,” said Sats in a statement in its FY2020/2021 annual report.

In FY2020/2021, the group handled around 55,100 flights, 4.1 million passengers and 43.7 million meals, compared to FY2019/2020’s 351,400 flights, 84.6 million passengers and 82.5 million meals.

Sats’ cargo handling segment was also hit hard.

Often regarded as one of the more resilient spots in the industry, cargo handled declined to 1.2 million tonnes from 1.8 million.

To better manage finances, the group lowered total expenditure by 42.9% y-o-y to $980.1 million.

Staff costs fell by $497.2 million on government reliefs and job cuts, in line with lower aviation volumes.

At that time, analysts were largely bearish about Sats’ near-term outlook, although they were optimistic about a recovery once Covid-19 ceased to be a global health crisis.

In a May 28, 2021 note, a UOB Kay Hian (UOBKH) report kept its “hold” rating with a lower target price of $4.09 from $4.27.

“We do not expect earnings to improve to pre-pandemic levels until after FY2024,” the note had said.

DBS Group Research’s Jason Sum maintained his “buy” call for the stock at an unchanged target price of $4.50. He wrote that Sats’ “pole position” in an attractive market like Singapore and the fast-growing Asia aviation market should en- sure the group’s resurgence.

Fortune reversal

Three years later, Sats has returned to the black market, posting FY2024 earnings of $56.4 million, while revenue came in at $5.1 billion, up 190% y-o-y.

Legacy volume for the group’s flights, air cargo and aviation meals also returned to pre-pandemic levels of 82%, 93% and 101%, respectively.

Analysts from Citi Research, OCBC Investment Research, UOBKH and DBS are maintaining their “buy” ratings.

While Citi and UOBKH have kept their target prices steady at $3.01 and $3.22 respectively, OCBC’s Ada Lim has raised her target price by 22 cents, from $3.09 to $3.31, after revising her estimates.

DBS’s Sum was the most optimistic, adding 20 cents to bring his target price to $3.60.

“Sats’ performance would have been even better if not for some forex losses during the period,” writes Sum.

“Free cash flow after lease repayment soared to $119.0 million in 4QFY2024, driven by a turnaround in Sats’ earnings and positive working capital inflow, marking a dramatic improvement from previous quarters, alleviating concerns on the group’s ability to generate free cash flow,” adds Sum.

The group’s results also beat the expectations of UOBKH’s Roy Chen.

Chen writes: “Despite overall weaker seasonality, Sats managed to achieve q-o-q higher net profit in 4QFY2024 at $32.7 million. The q-o-q increase was driven by better performance in Asia Pacific under Sats’ original businesses, which benefitted from better operating leverage.”

Several factors have helped Sats return to profitability, with the biggest coming from the return of aviation.

Sats’ acquisition of Paris-based cargo handler Worldwide Flight Services (WFS) for $1.7 billion was another factor.

First announced at the end of September 2022, the funding plan totalled $1.8 billion.

Of this, $800 million came from a renounceable underwritten rights issue, $700 million from a term loan and $320 million from existing cash.

The issue consisted of 363 million new shares at $2.20 each, with the group’s largest shareholder, Temasek, taking up its full entitlement of 39.68% and the remaining 60.3% underwritten by the three local banks, and the Bank of America and Citigroup.

Although Sats received 96.8% shareholder approval for the acquisition in the January 2023 EGM, concerns were raised over debt and share dilution.

Group CFO Manfred Seah says these wor- ries had already been weighed carefully before the acquisition.

In a recent interview, he told The Edge Singapore: “There are two things that we always make sure of: We mustn’t overpay and we don’t buy a business that we don’t already know. We actually bought a business (WFS) that we know very well and we’ve been running this business (cargo handling) for the last 30 to 50 years.”

Mok adds that in recent AGMs, shareholders have even said the acquisition has paid off in light of the better results.

WFS, with its leading position in cargo handling in North America and Europe, helped to diversify the earnings streams for Sats.

Before the acquisition of WFS, Sats’ revenue was mainly concentrated in Singapore, with just over half coming from the Food Solutions business segment.

The acquisition has since allowed the group to diversify its regional portfolio and business mix. In FY2024, Singapore contributed 34% to Sats’ revenue.

In comparison, the Americas contributed 36%, while Europe, the Middle East and Asia (EMEA) contributed 20%, with the remaining 10% coming from the Asia Pacific region.

In terms of business mix, Food Solutions contributed the least revenue at 22%, followed by ground handling at 29% and cargo handling at 49%.

“People look at this acquisition as an aggressive move. You need to look at it as a defensive move; we’re defending our turf, acquiring a bigger platform,” says Seah.

He adds: “During the pandemic years, our revenue dropped 90% to 95%, but fortunately the government was very helpful. If we stay still and this happens again, we may not be so lucky.”

WFS’s acquisition has also helped Sats to seize other opportunities, such as its value chain and sustainability agreement with Swiss Market Index (SMI) listed global logistics firm Kuehne+Nagel, in which Mok notes that Sats was the only company the logistics firm was in conversation with.

Catering beyond the skies

Another avenue of growth for the group has been in its Food Solutions business.

Already recognised as a leading aviation caterer for multiple international airlines, Sats has sought to strengthen its current production capabilities while extending its catering services to consumers on the ground in the form of microwaveable ready-to-eat meals.

In 2021, Sats acquired an 85% stake in Thai frozen foods company Food City for $21 million.

Food City’s 30,000 sqm Pathumthani food production facility can produce 90,000 ready-to-eat meals daily.

Two years later, the group opened a $42.2 million 21,553 sqm automated central kitchen between Tianjin and Beijing in China.

This year, Sats launched its newest and largest Food Solutions facility in Bengaluru, India, near Kempegowda International Airport.

Covering 221,000 sq ft, the facility can produce up to 40,000 kg of ready-to-eat meals daily.

In Singapore, Sats offers several ready-to-eat brands, such as Farmpride, its frozen foods label, which is available at NTUC Fairprice outlets, and The Travelling Spoon, a halal-certified microwaveable food brand created in collaboration with local hawker brands and distributed through 7-Eleven convenience stores across the island.

Starting Oct 1, Sats will restructure its Gateway Services business into two new business units — Singapore Hub and Gateway Services Asia-Pacific — due to its evolving scale of operations and global presence.

Currently, Gateway Services involves end-to-end ground handling services such as passenger, cargo and baggage services.

The restructuring will allow the Singapore unit to focus on Singapore’s current and future needs as an air hub. In contrast, the Asia-Pacific arm will focus on growing the group’s market share in other markets and managing operations in overseas airports.

At the restructuring’s announcement on Jul 10, Mok said: “Having deliberated this with our board for a while, we’ve now come to a stage where we believe it is the right time to make a move, particularly after one year of integration with WFS.”

“This is part and parcel of our overarching strategy of creating a global multinational company headquartered out of Singapore,” he adds.

More importantly, no costs will be incurred in the restructuring, with the CEO explaining that the group is simply changing the segment’s focus and leadership on the ground.

Mok adds that there will be no overlap between Gateway Services Asia-Pacific and WFS, except in Bangalore, where the latter already has a presence as a cargo operator.

Clear skies or cloudy outlook?

In its latest 1QFY2025 ended June, Sats posted a patmi of $65.0 million, reversing from the loss of $29.9 million in 1QFY2024, Sats’ first financial results after completing the acquisition of WFS.

Total revenue came in at $1.37 billion.

Revenue for Gateway Services increased 12% y-o-y to $1.06 billion due to higher air cargo volume driven by high-tech shipments, the growth of e-commerce and the shift from ocean freight due to the Red Sea crisis.

The Food Solutions segment also grew 9.3% y-o-y to $310.8 million from higher demand for inflight meals.

Sats’ expenditure, excluding depreciation and amortisation, increased by 8.7% y-o-y to $1.1 billion, in line with higher business volume.

Meanwhile, free cash flow stood at $36.7 million, $125.9 million higher on the back of higher y-o-y operating profit.

CFO Seah says that the group intends to maintain its operating leverage as one of its key strengths and that an “equilibrium” of sorts has been reached.

He explains: “We certainly want to go forward while maintaining it, due to two contributing factors. Firstly, revenue has scaled up significantly thanks to the growth in cargo volume, ground handling and aviation meals, and fixed costs have all been defrayed.”

“The other factor is the cost initiatives that we have put together.

Cost synergy is a little bit more difficult to actualise, so we need to be intentional on this.

These cost initiative streams are still ongoing, and we are confident that we will continue to be able to put a lid on cost increase,” says Seah.

Sats and WFS also achieved annualised “ebitda synergies” of over $51 million out of the targeted $100 million, in addition to the $50 million to $60 million of annual financing and fiscal savings previously guided by the group.

On achieving more than half of the targeted synergies within a year, CEO Mok says: “We said that the $100 million synergy target at the start of the acquisition was based on a five-year target. As you know, as you get closer to the target, it does get harder to reach those numbers. What we have achieved is excellent growth and good synergy. From a commercial standpoint, we’ve been able to leverage our network to gain more share of wallet.”

Looking ahead, Sats aims to achieve $8 billion in revenue, an ROE of 15% by FY2028 and $10 billion in market capitalisation after FY2028.

Realising this, however, will be challenging, given its JV and acquisition strategy.

Mok says that Sats’ balance sheet will be able to support the group’s plans while restoring profitability with a level approach.

“We have already projected a lot of these initiatives three to five years down the road. This financial year, we have set aside around $300 million in capex. In addition, we need to set aside another $200 million to pay down debt,” explains the CEO.

Following the 1QFY2025 results, analysts at Citi and DBS have kept their respective “buy” calls on the group with unchanged target prices of $3.76 and $3.60, respectively.

UOBKH has likewise maintained its “buy” call, albeit at a raised target price of $4.00 from $3.22.

Citi’s Kaseedit Choonnawat, Eric Lau and Amy Han note that Sats’ core profit of $57.8 million in 1QFY2025 formed 30% of the streets FY2024/FY2025 estimates.

They write: “Sequential traffic recovery at Changi and global air freight improvements along with Sats/WFS transformation should continue to drive earnings and share price higher.”

“We see potential mid-term upside from Sats’s fresh frozen meal capability, which is yet to become material,” adds the team.

On the other hand, the team at DBS is pleased with the group’s free cash flow, which they note places it “on track” to reduce its net debt of $200 million in FY2025.

“With Sats also continuing to make more progress in realising operational synergies from WFS, and potentially benefiting from lower interest rates over the next two years, given that a considerable portion of its borrowings are due to mature over the next two years, we are inclined to believe that we could see more positive surprises in the subsequent quarters,” concludes the team.

Similarly, UOBKH’s Chen sees the improved free cash flow as a positive signal, noting that a paring down in net gearing will be a key catalyst for the analyst in his future re-ratings.

Chen writes: “Its net gearing stood at 74.5% at end-1QFY2025, a moderate improvement from the 80.2% level at end-FY2024.

Sats’ net gearing is expected to continue declining in the next few years as the company is committed to bringing down debt levels.”

In her report, analyst Denise Wong from Bloomberg Intelligence writes: “Consolidation of WFS could boost Sats’ annual revenue by up to 3 times its FY2019 figure this year, and its ebitda by at least 2.5 times.”

She adds that the group’s net profit will likely exceed FY2019 readings in FY2026 from M&A synergies, which will neutralise the impact of lower ebitda margin and increased interest expenses.

“Sats’ net profit appears on track to beat full-year consensus forecasts for $196 million, underpinned by passenger and cargo volume growth, operation cost increases and easing M&A-related expenses,” writes Wong.

Although Sats says risk reduction and bal- ance define its growth strategy, its targets remain ambitious.

Group CEO Mok concludes: “I hope we continue to rise. From what we know and the numbers we’ve seen today, the momentum is still there, so we are cautiously optimistic that this can be maintained. If the volume is maintained at its current level, coupled with what we’ve done to manage costs and drive yields up, we hope this thrust will continue until the end of the year.”