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2 Long-Term Growth Drivers for SATS Ltd

Royston Yang

SATS Ltd (SGX: S58) is a leading provider of food solutions and gateway services for airlines. These include airline catering, airfreight handling, baggage handling, and also cruise centre management. SATS is present in over 60 locations and 13 countries across Asia-Pacific and the Middle East.

Investors who are looking for exposure to Asia’s fast-growing tourism industry should take a second look at SATS, as the group is a leading player in the airline catering and gateway services sectors. SATS is riding on the growth of visitors to Singapore, while also latching onto opportunities in China and other Asian countries to grow its business.

With its market-leading position, SATS is well-equipped to lead the consolidation of smaller players that may not have the same scale and cost efficiency. The group has been engaging in small, bolt-on acquisitions for the past few years in order to boost its capabilities in a variety of service offerings. With markets in many Asian countries still very fragmented, I believe there’s much more room for SATS to continue to grow its market share.

Here are two long-term growth drivers for SATS that should allow the group to enjoy many more years of growth.

1. Consolidation of the airline catering market

According to SATS’s Capital Markets Day presentation, Asia-Pacific is set to be the fastest-growing region for airline catering. The projected compound annual growth rate (CAGR) for the in-flight catering services market revenue from 2017 to 2023 is expected to be 8.5% for Asia, which is almost twice the projected growth rates of 4.5% and 4.4% for Europe and North America, respectively. SATS is well-positioned to grow along with the overall growth in airline catering demand as it is a key player in this industry with a long, outstanding track record.

A wave of consolidation in the airline catering industry is expected to be driven by airlines that are planning to divest their catering arms. For Asia-Pacific, the good news is that the airline catering peers are fragmented and smaller than SATS, making it easier to execute bolt-on acquisitions in order to consolidate the industry.

2. Central kitchen provider for foodservice chains

SATS’s announcement of its acquisition of 50% of Nanjing Weizhou back in May 2019 demonstrated the company’s commitment to growing in the Chinese market. Not only did the business provide airline catering to Chinese airlines such as China Eastern Airline and China Southern Airline, but it also doubled up as a central kitchen to foodservice chains and restaurants. SATS already has famous brands such as Haidilao and He Ma as clients, so the idea is to continue to penetrate China and India through central kitchen acquisitions in order to beef up its capabilities in providing food services to even more brands.

The addressable foodservice markets in China and India are expected to grow at a 4% CAGR and 6% CAGR, respectively, from 2017 to 2023. As with in-flight catering, there’s also no clear leader in the central kitchen business as the industry is extremely fragmented. This provides SATS with clear opportunities to slowly acquire and consolidate the industry.

Ambitious acquisition plans

Source: SATS Capital Markets Day Presentation Slides

SATS has earmarked around S$1 billion in capital expenditure (capex) over the next three years in order to achieve these long-term growth objectives. This is a significant increase from the group’s historical capex pattern. It remains to be seen if the acquisitions will contribute meaningfully to earnings and cash flow, but investors should feel optimistic that the group has a well-defined strategic plan moving forward.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of SATS Ltd. Motley Fool Singapore contributor Royston Yang owns shares in SATS Ltd.

Motley Fool Singapore 2019