Better Aviation Stock: Singapore Airlines Versus SATS

The aviation industry breathed a sigh of relief back in 2022 when travel curbs were fully lifted as the pandemic eased.

Fast forward two years, and Singapore now expects visitor arrivals for 2024 to come in between 15 million to 16 million.

These tourists are expected to bring in tourism receipts of between S$26 billion to S$27.5 billion.

Yet, 2024’s prediction is still below 2019’s record 19.1 million visitor arrivals.

As the aviation and travel industry continue to recover, investors may be wondering which stocks they can buy to ride this recovery.

Singapore Airlines (SGX: C6L), or SIA, is Singapore’s flagship carrier and a key beneficiary of the travel rebound.

SATS Ltd (SGX: S58) is another beneficiary of the aviation boom as the blue-chip group provides catering services and ground handling to various airlines and food and beverage chains.

We place these two companies side by side to determine which makes the better investment choice.

Financials (FY2024)

First off, we start by looking at each company’s fiscal 2024 (FY2024) financials as both have a 31 March fiscal year end.

SIA pulled off a strong performance with revenue rising by 7% year on year to S$19 billion and net profit climbing 24% year on year to S$2.7 billion.

Over at SATS, revenue soared nearly threefold year on year to a record-high of S$5.1 billion as the ground handler consolidated the financials of newly-acquired Worldwide Flight Services (WFS).

SATS also posted a stunning turnaround with operating profit coming in at S$244.2 million and net profit clocking in at S$56.4 million.

Although impressive, it is still early days for the enlarged SATS and we prefer the steady profits announced by SIA for FY2024.

Winner: SIA

Debt levels

Next, we look at each company’s debt levels to ascertain which provides more stability and assurance.

SIA has a significant pile of cash (S$11.8 billion) with part of it raised from its Mandatory Convertible Bonds (MCBs) issued during the pandemic.

The airline had a net cash position of S$2.1 billion as of 31 March 2024.

In contrast, SATS took on a significant pile of debt to finance the acquisition of WFS.

Hence, the food caterer was in a net debt position of S$2.1 billion for FY2024.

Looking at debt metrics, SIA’s debt level was lower as a percentage of its total equity, coming in at around 0.6 times versus SATS’ 1.14 times.

Winner: SIA

Free cash flow (FCF) and FCF margin

The next attribute is each company’s ability to generate free cash flow.

Both companies generated healthy levels of free cash flow for FY2024.

On an absolute basis, SIA generated more than 10 times the free cash flow that SATS generated.

SIA also had a significantly better free cash flow margin (defined as the level of free cash flow divided by the company’s revenue) of 19.6% compared with SATS’ 6.3%.

Winner: SIA

Dividends

The next attribute, dividends, should interest income investors.

SIA paid out a generous final dividend of S$0.38 along with an interim dividend of S$0.10, taking its total FY2024 dividend to S$0.48.

At the last done share price of S$6.74, this translates into a trailing dividend yield of 7.1% and was also a 26% year-on-year jump from the previous fiscal year’s S$0.38 total dividend.

For SATS, the group did not pay out a dividend since the pandemic broke out in 2020 and FY2024 was the first dividend paid out in four fiscal years.

The yield is a paltry 0.4% at SATS’s last done share price of S$3.74 but investors can look forward to higher dividends if the business continues to improve.

Winner: SIA

Financials (1Q FY2025)

Both companies released their latest business update for the quarter ending 30 June 2024 but only displayed their profit and loss statements.

We used this as an additional attribute in determining which business is more attractive.

Although SIA saw revenue inching up 5.3% year on year, its net profit plunged 38.4% year on year because of higher expenses.

SATS, on the other hand, was still going strong with a 15.5% year-on-year revenue increase and with operating profit soaring more than 14-fold year on year to S$112.9 million.

SIA’s results highlight the volatility inherent in the airline industry whereas SATS’ business offers a more stable earnings profile.

Winner: SATS

Get Smart: SIA is more sensitive to macroeconomic factors

While SIA ticked off most of the boxes earlier, we tend to favour SATS as an investment candidate.

This is because the airline business can be negatively affected by many external factors that are beyond its control.

One aspect is oil prices, which have surged in recent days because of the outbreak of hostilities between Israel and Iran.

SIA’s heavy reliance on fuel means that the airline is held hostage by fluctuating oil prices, with only its fuel hedges serving to protect it from the volatility.

War can also disrupt flight paths, as evidenced by major airlines diverting their flight paths after Iran’s missile attack on Israel.

Finally, natural disasters such as volcanoes or typhoons may also cause flights to be cancelled or diverted.

Late August showed us a good example of this when SIA cancelled flights between Singapore and Osaka as Typhoon Shanshan approached Japan.

Because of the reasons above, and also because SATS is seeing healthy year-on-year profit increases, we believe SATS will make a better aviation investment candidate.

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Disclosure: Royston Yang does not own shares in any of the companies mentioned.

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