Is SATS shares worth buying now? (SGX: S58 / SATS.SI)

Business Background

SATS Ltd. was founded in 1972 and was formerly known as Singapore Airport Terminal Services Limited. SATS Ltd. is based in Singapore where it is an investment holding company that mainly provides gateway service and food solution in Singapore, Japan and internationally.

SATS Ltd. Business Operations:

• Food Solutions. Inflight and institutional catering, food distribution and logistics, industrial catering, chilled and frozen food manufacturing
• Gateway Services. Airfreight handling, passenger services, ramp handling, baggage handling, aviation security and aircraft interior cleaning.
• Others.

SATS’s network of ground handling and inflight catering operations spans nearly 40 airports in the Asia Pacific region

Customers of SATS Ltd.:

• Airline
• Hospitality
• Healthcare
• Food
• Education
• Airfreight and logistics industries
• Government

DEBT TO EQUITY RATIO

Check for: Less than 0.5 D/E Ratio

Looking at the latest financial report for Year 2021.

SATS have a D/E ratio of 0.565.

This is higher than 0.5 D/E Ratio.

D/E ratio of more than 0.5 will means that the company might be having high level of debt, which means the stock might be over leveraged.

With a D/E of just slightly above 0.5, it barely failed my criteria.

To understand this stock better, I’ve done a quick look at the past Debt to Equity Ratio for SATS:

Looking at the past data of SATS, it seems that the D/E ratio only start to raise after the outbreak of the pandemic in 2019 which is reflected by the increase in D/E ratio in year 2020 and 2021.

Knowing SATS’s business is highly depending on the aviation industry, the recent pandemic have impacted SATS’s bottom line greatly.

The reduce in travelling of flights around the world have negatively impacted the company to increase it’s ability to generate higher revenue and income.

Although the company have exceeded the 0.5 D/E ratio, but I think it is temporary. 

My Opinion: Fail (Partially)

Dividend Yield

Check for: More than 2.5% dividend yield

For Year 2021, SATS pay a dividend of SGD 0.00 which is about 0.00% in dividend yield.

SATS did not pay any dividend for the year 2020 and 2021.

0.00% yield is lower than my target of 2.5%.

Looking at the distribution history, the last dividend payment is in year 2019, which is probably due to pandemic.

For dividend stocks, I’ll prefer if they will pay a stable dividend that is growing.

The dividend yield is also much lower than the risk free rate (CPF OA Account) of 2.5%. I will give it a verdict of fail.

My Opinion: Fail

Dividend Payout Ratio

Check for: Less than 80% dividend payout ratio

At the time of writing, a quick check with some online tools for getting stocks info shows that the dividend payout ratio for SATS is a 0.00% which basically make this section non-applicable.

With a payout ratio of 0%, it means the company retained all earnings if any, and did not payout any dividend for the financial year.

Although SATS did not payout any dividend for 2020 and 2021, it is totally understandable as it’s business is greatly impacted by the pandemic.

It will be wise for the management to keep enough cash to weather the storm.

Although SATS might be a good dividend stock in the future, SATS fail this section at the time of writing.

My Opinion: Fail

EPS Growth Rate

Check for: More than 10% EPS Growth

Earning Per Share (EPS) helps to analyze the profitability and quality of a stock.

Here, we will like to see an EPS growth of 5 years or more.

Quick check on the 2021 financials.

The EPS 5 year growth rate is “Blank”!

There is no Earning Per Share (EPS) for SATS in 2021!

When there is no EPS growth rate, it means the company is not earning for the current financial year.

The cause of having a negative EPS for 2021 is probably due to the pandemic.

Even so, I may not want to invest in a company that is not earning money.

My Opinion: Fail

High Return Of Equity (ROE)

Check for: More than 10% ROE

ROE is one of the most important ratio used by Warren Buffett.

Return of Equity is used to measure the management’s ability to make a return on our investment.

At the time of writing, the ROE of SATS have an ROE of -5.0%.

A deep dive into the history of SATS shows it usually have an ROE of >10% until 2021, where it have a ROE of -5%.

SATS’s historical ROE have been pretty good and is usually above 10%. But as the pandemic arise, it have reduced it’s ROE to -5% thus it is reflected in 2021’s financial data.

Although SATS may have great future potential as a good dividend stocks, a ROE of around -5.0% means that it is losing shareholder’s equity at 5.0% per year.

My Opinion: Fail

PRICE-TO-BOOK RATIO

Check for: P/B Ratio of less than 1.8

SATS is probably most investor’s favorite dividend stock. SATS provide almost all service for Changi airport and all airline that comes through Changi airport.

With so much attention on SATS, the price of the stock will most likely be traded above it’s valuation (book value).

At the time of writing, the current P/B ratio of SATS is 3.012.

Meaning, it is trading at 3 times its book value.

My Opinion: Fail

MOAT

Check for: Not just having a MOAT, but a great MOAT

SATS is probably the most important company that provides almost all the services for Singapore’s Changi Airport which is know for it’s world class service and experience.

Similar to SIA Engineering which is the main service provider for aircraft servicing in Singapore Changi Airport, SATS provides services that are mainly customer facing and food oriented.

SATS is currently the Asia’s leading provider of food solutions and gateway services which helps to delight customers with innovative food solutions and seamless connections.

SATS’s Top 10 Competitors

1. Servair Air (Food Distributors industry)
2. Gate Group (Food Processing industry)
3. LSG Sky Chefs (Baked Goods, Frozen & Prepared Foods industry)
4. Gate Gourmet
5. Flying Food Group
6. New Rest Group
7. SCK Sky catering Kitchen
8. INFL
9. DNATA
10. Hawaiian Airlines

With it’s base in Singapore, SATS serve over 55 locations in 14 countries.

SATS has been described as the third most-admired company in Singapore, second for the quality of its services and for corporate reputation, and placed fourth for innovation.

According to Phil’s book Rule#1 investing, SATS have a strong ” Toll Bridge MOAT” and a “Brand MOAT”.

Toll Bridge MOAT is probably the best and most important MOAT of SATS. Toll bridge moat prevent competitors from coming into the picture, allowing SATS to have most of the business that comes through Singapore Changi Airport.

Brand MOAT can be an attractive MOAT. Providing safe food solutions and world class gateway services is probably what SATS’s brand moat stands for.

With Singapore Changi Airport as it’s backer and support from the Singapore’s government.

In my opinion, SATS’s MOAT is pretty strong.

My Opinion: Pass (Great!)