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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 12 Dec 2019, 12:51 PM

 

SATS - Capital Markets Day 2019 Takeaways – More Growth Drivers Ahead

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  • Plans outlined to strengthen position in Gateway Services and Aviation Food Solutions.
  • More digital platforms, kitchens, and investments to enhance scale, regional connectivity, and growth.
  • Capex to accelerate to S$1bn over the next 3 years.
  • Maintain BUY and Target Price of S$5.44.

What’s New

More growth drivers ahead.

  • SATS LTD. (SGX:S58) conducted a capital markets day for analysts and fund managers to outline its next leg of growth.
  • SATS sees more growth opportunities outside of Singapore and in the non-aviation segment. It reiterated its core purpose of feeding and connecting Asia through four key priorities of
    1. consolidating APAC’s aviation catering market with a digital supply chain;
    2. consolidating APAC’s air cargo handling market onto a digital platform;
    3. becoming a leading central kitchen supplier to the food service industry in China and India; and
    4. developing a digital travel retail platform for passengers.
  • The first 3 are key opportunities identified to consolidate leadership across air catering, ground handling, and as a central kitchen provider for fast food chains in Asia, while the fourth is to develop a passenger digital platform to access customers directly.

Strengthening Gateway Services and aviation food solutions while non-aviation food sector in China is a new growth engine.

  • SATS’ strategy going forward is to strengthen its current position in Gateway Services and Aviation Food, while becoming a leading central kitchen supplier in China for the non-aviation food sector. The central kitchen business offers high growth potential as SATS penetrates China and India over the next few years.
  • Growing the central kitchen business also helps to diversify concentration away from Aviation and into the Food service sector.

Food Solutions – Building Up Scale and Network of Kitchens

Penetrating new food service segment while strengthening aviation food kitchens.

  • The key strategy we see here is to drive growth through building up its kitchen network regionally to gain scale while targeting a new food service sector especially in China. The new food service sector will likely drive most of the growth going forward since it has the potential to ramp up.
  • Strengthening its regional network of flight kitchens and with scale and digitising supply chain capabilities will help to defend against pricing and margin pressures in aviation food.

Growing non-aviation food solutions.

  • As of FY19, non-aviation food contributed 14% to total revenue. The non-aviation fast/casual food service segment has been identified as a fast growing industry in China and India. Key strategy is to accelerate development of this new segment in the food business to become a leading central kitchen supplier to the food service industry in China and India.
  • The current Kunshan kitchen has a capacity of 50,000 meals a day and mainly serves customers comprising Yum! Brands, Hai Di Lao, Shangri-La Hotel, and Disneyland. We believe growth would come from establishing or acquiring more of such kitchens in China.

Strengthen scale, lower costs to defend margins in aviation food.

  • One of the key challenges in the aviation food segment has been pricing and margin pressures. Therefore, leveraging on scale is key to bringing costs down and defending margins.
  • The 2 initiatives for aviation food solutions are the 3-tier kitchen concept and building up capabilities in digital supply chain to gain operational leverage. It can scale up and consolidate production to maximise cost benefits through the 3-tier kitchen concept comprising local kitchens, central kitchens, and regional food factories – for big batch production which helps to drive cost down.
  • Digitising supply chain platforms helps to consolidate operations together while interacting with customers better. It can help to facilitate a supply chain procurement model and determine make or buy decisions for food which will lower costs and prevent over ordering and wastage.

Gateway Services Enhancing Efficiencies Through Digitisation

Digitising for better connectivity.

  • Gateway Services has seen revenue growth of 4.7% CAGR from FY15-19, with EBIT growing at 24.4% CAGR over the same period. This is on the back of better passenger, air traffic and cargo volumes. We believe the key strategy is to enhance connectivity with customers regionally through digitisation.
  • A Digital Control Tower platform aims to achieve an efficient hub operation with airlines, improve tracking for cargo, enhance passenger and baggage transfers and even end-to-end travel retail services for passengers. It will also build a digital cargo platform to achieve a more integrated and digitally connected supply chain capability, in view of more e-commence transactions.

S$1b Capex Including Investments in the Next 3 Years

  • Total capex and investments for the past five years was approximately S$680m, averaging at around S$227m per year. Capex plans for the next 3 years is planned at S$1bn.

BUY Recommendation Maintained, No Change to Earnings

  • We remain positive on SATS as Changi and the region’s aviation growth will continue to drive the long-term earnings growth for the stock. The stock continues to be supported by a decent dividend yield of 4%. See SATS' dividend history.

Source: DBS Research - 31 May 2019

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