SATS Ltd (SGX: S58) is a company with two business segments, namely, Food Solutions and Gateway Services. The former covers services such as airline catering, food distribution, and industrial catering. The latter is involved in ground handling services of passengers, flights, ferries, and cargo.
Over the past five years, SATS has rewarded its shareholders richly, with its stock price up by 81% in total. This dwarfs the Straits Times Index’s (SGX: ^STI) return of just 6.5% over the same time frame. Whether or not SATS can continue being an outstanding investment would depend heavily on the change in the company’s profit over time. This makes an understanding of SATS’s cost structure important – after all, a company’s profit is what is left after deducting costs from revenue.
In this article, I want to have a look at SATS’s cost structure. Here’s a chart showing SATS’s costs for its fiscal years ended 31 March 2017 (FY2016-17) and 31 March 2016 (FY2015-16):
Source: SATS FY2016-17 annual report
There are a few observations we can draw:
1. Staff costs is the biggest expense for SATS. In fact, it dwarfs all of SATS’s other cost categories, combined. In FY2015-16, staff costs made up 55.7% of SATS’s overall expenses, and this percentage had grown to 57.2% in FY2016-17.
2. A significant amount of SATS’s costs appear to me to be fixed in nature. As examples of cost categories that are clearly fixed, we have the depreciation and amortisation, company premise and utilities, and licence fees categories. Staff costs are likely to be a mixture of both fixed and variable.
3. If business volumes for SATS increases in the future (which has been the case for the company in the past few years), the fixed cost per unit of service will likely decline, leading to higher profitability for the company.
By understanding SATS’s cost structure, investors can gain a clearer perspective on its future profitability.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn't own shares in any companies mentioned. The Motley Fool Singapore has a recommendation for SATS.