SATS

[money]

Nice discussion from everyone here. I think the main issue here is how long this C19 will last. It is a given that for the next 2 quarters, earnings for SATs will fall. And probably bad enough such that earnings is so low that you may even get a p/e of 100, which is essentially meaningless when you have a low denominator

jfc's perspective that not every country has a decent healthcare system resonates with mine. It is because our authorities take it really seriously that you dont see infected numbers jumping by hundreds and thousands, we cant say the same for other countries

[dreamybear]

Now my question is, do you think most countries govt (first world to third) and their healthcare systems can do what Spore has done, which is to take well-coordinated, swift and decisive actions? If the answer is a resounding yes, then Covid19 will be short lived, maybe eradicated by summer as some experts have pointed out. If the answer is a dismal no, then Covid19 will perhaps be a long drawn battle which may take years (not months) to play out, and it may jolly well be present in mankind forever until a viable vaccine is invented. I hope I am wrong but my thinking is more geared towards the latter answer.

At pre Covid19, SATS PE is 20x at $4. The most optimistic take is its earning will be halved, so PE will be 40x now. However, it can easily bleed money for many quarters before a turnaround of fortune. How can SATS be cashflow positive when global air traffic is not taking off? Forget about the dividends. If there's no earnings, there can be no dividends so as to speak.  

SATS is a wonderful business to own. It's long term prospect is bright. Changi T5, rising middle class of S.E.A, China and India, captain of its industry, competent mgmt, strong economic moats. But at $4 in time of Covid19 crisis, is it a fair price to pay? My take is that it still has plenty of room to fall. The share price must reflect its earnings and cashflow somehow.

What you mentioned abt comparing other countries with SG struck a chord with me. I always remind myself to not use SG as a reference(local/home bias) because in the grand scheme of things, we are just a very small city that we even hv to be mindful of our airspace/ waterways(for the free flow of gds & services), the political parties forming the govts in our neighbouring countries during their elections, being a price-taker, etc. Sometimes, I am not sure what the the media is trying to convey whenever they simply publish country related comparison rankings (be it Covid 19 cases, cost of living, best country to live, etc) without comprehensive background context. It doesn't make sense to simply compare say Jap, China, etc vs small SG.

Other than the healthcare system(infrastructure, manpower, logistics, etc), there could be other challenges to handle in other countries, e.g. :
https://www.mothership.sg/2020/03/batam-...uarantine/
“One of them was already quarantined but then ran away. Another has refused since the beginning and can’t be reached now. They refused to be quarantined because they’re afraid of losing their jobs and income,” Riau Islands Health Agency head Tjeptjep Yudiana said on March 3.

I am in agreement too with your part on the "downstream" effects  like young children, aged parents. Adding to that, for children in child care / primary schools or even living in an estate with a lot of elderly neighbours - it can potentially be a "social" nightmare to deal with.  

There seems to be a possiblity that because symptoms can be mild and common(like sore throat), people may already hv been infected without them knowing. And with the easier transmission, a lot of people cld actually be carrying the virus :
https://www.mothership.sg/2020/03/can-co...singapore/
"Harvard epidemiology professor Marc Lipsitch told the publication that he predicts about 40 to 70 per cent of people around the world will be infected with
the SARS-CoV-2 (the virus that causes Covid-19) within the coming year."

Yes, great in depth discussion on SATs here.

In general, I also have a conservative estimate on 50% drop in earnings when I evaluate my targetted stocks(in general, not just referring to SATS) given the whole world(as welll as the entire supply chain) is probably affected in one way or another. Like what fellow buddies mentioned, I am inclined to think that this covid19 episode is eventually going to pass, and good established companies with a track record will likely resume their earnings & outlooks in 1 or 2 year's time and valuations wld probably fall back to "normal" as well. In my view, the price discounts for equities are somewhat a "short term reaction" to a specific event and may be available for only a small time window(couple of mths ?). Then again, who knows if the mkt then decides on fixating on another event like the US Presidential Election.

For what it's worth, even the great legend himself "took the plunge" recently. I am very surprised because I thought it's too early to buy, especially for an airline business which is probably going to be badly affected.
https://www.foxbusiness.com/markets/buff...e-purchase (Published March 3)
"Buffett spent $45.3 million on 976,507 shares of Delta on Thursday, according to a regulatory filing on Monday, paying an average price of $46.40."

"But no one can tell you this is the time to buy.  Nobody knows."
https://www.oaktreecapital.com/insights/...arks-memos (March 3, 2020)


PS Weijian : Agree it's a gd idea to hv a dedicated covid19 thread, but because I am directly referencing to a post so I parked my comments here. Hope you understand.

[jfc18]

Hi Ivan and weijian,

Thank you for you insightful inputs on the Govt support schemes which I have not given a thought to. To be conservative and not to inflate the Op Expenditure and Op Losses, I have actually painted a more rosy picture and used the numbers from full year FY18-19 statements for the back of envelope calculations. If we were to used the latest 9 months FY19-20 numbers vs 9 months FY18-19, the rise of OPEX this year actually increased by 14.1%, out-pacing the 11.2% growth of Revenue, which resulted the Net Profit to decrease by 12% compared to last year results.

Similarly, the 14% Net Margin I have quoted in my previous post is from FY18-19. For 9 months FY19-20, the Net Margin has since fallen to 11.6%. SATS fundamentals has actually started to deteriorate since last year March. Do note that the 9 months FY19-20 numbers ends at Dec 19, which is pre Covid crisis. SATS financial year ends at March.

I have also kept the revenue from non-aviation segment constant in my calculations, where in reality, SATS derives a portion of its non-aviation revenue from MICE food catering.

Since SATS is in a service industry with little physical assets, we know PTB valuation is not meaningful. So what determines its share price is the future earnings and cashflow. As I have commented, at $4, PE 20x, earning yield of 5%, Mr Market is already pricing SATS accordingly to its post Covid19 earnings in a V shape 3-6 months recovery scenario. If these high expectations aren't met or Covid crisis last longer, Mr Market will have to reprice SATS, no?

We can all agreed SATS is a wonderful piece of business. With a solid balance sheet, negligible debt, it will emerge from this crisis stronger than its competitors. So the real question we should be asking is, when will Covid19 be contained worldwide, so people can start flying again. I hope I am certainly wrong, but my feel is that at the rate Covid19 is spreading, it is reasonable to assume it may last longer than SARS (8 months). Even developed countries with world class healthcare system like Spore, South Korea, France, Germany have difficulties containing it. What chances are left for the undeveloped countries?

No worries, we are here to learn from each other viewpoints and have constructive discussions. As you mentioned, in FY2020 SATS will definitely see a dip in revenue/profits and might even go into operating losses. This is a certainty. Because of this certainty, the market has priced this fact in at a 22% cut of its share price to a PE of 20. Otherwise, the fair PE that the market has given SATS was 25. Will the market give you a further discount? No one knows. We have to ask ourselves if a lower PE (TTM) of say 15 be appropriate for approximately 1 year of covid19 downtime. If you think so, then you should probably buy in at $3.

For me personally, I can't predict what will happen but for a monopolistic business like SATS, a PE of 20 is fair. We can't use the FY2020 results to calculate anything because this is a black swan event which constitutes as a one-off event, and does not reflect future earning power. Unless you think future earnings will follow the new trend in FY2020, using FY2020 numbers to calculate intrinsic value is moot.

Also, you mentioned that SATS fundamentals have deteriorated as opex have increased 3% more than revenue and net margins decreased by 2% y-o-y. IF we were talking about a business that is not expanding at such a rapid pace, i would agree that "fundamentals are deteriorating". A good example of such a business is Kingsmen Creatives which is another VB favorite. However, for a business that is busy expanding organically and inorganically into so many different countries, as well as new non-aviation sectors, I would say this is hardly an issue as higher gestation costs are common. It is a similar strategy as Amazon, except that SATS has a much better earning power. Once it has successfully cemented its new positions in Japan, China, Middle East, India etc, we will see a reversal in fortunes. Let's not forget that SATS is constantly hitting the headlines for R&D on better processes and putting emphasis on efficiency. 

If the share price does drop further, I will be definitely be buying more. However, I am comfortable initiating a position in tranches as of now. SATS will have no worries seeing out this covid19 crisis. Of course, if there are any fundamental developments regarding SATS itself or macro worries not related to covid19, then I will have to realign my position. This is purely taking into current situation with the covid19 issues. 

Thanks.

Hi Ivan,

It seems that you have analysed SATS as a growth stock, which is expanding it's businesses fast, thus the high PE of 20x - 25x is justified. That may not be the case. 

SATS Earnings Per Share
FY16: 23.2c
FY17: 23.4c
FY18: 22.3c
FY19: 19.6c (This EPS is estimated since there's only 9 months of record for this year. I have simply used FY18 of 22.3c, discounted by 12%, which is in-line of the decrease of latest 9mFY19 vs 9mFY18 net profit. The actual EPS should be lower than my estimate since Q4 of Jan-Mar will be affected by Covid19.) 

SATS earnings for the past 4 years have been stagnant, at best. 

You mentioned as SATS is busy expanding organically and inorganically, high gestation cost is common, hence perhaps earnings will take off later. But 4 years is not a short period. My feel is that while they are dominant in Spore, they are facing roadblocks at their overseas ventures. 

I can understand your point of view that if a company is expanding fast, gestation cost is high, earnings can remain stagnant or even drop. However, if a coy is indeed expanding, never mind the earnings and expenditures, its revenue y-o-y must grow, yes? 

SATS Total Revenue
FY14: 1753m
FY16: 1729m
FY18: 1828m

I have not used FY19 numbers since it is incomplete. As we can see, for the past 5 years, SATS revenue has only increased by a mere 75m, which works out to be a 0.84% CAGR. Hardly exciting stuff for an expanding coy.

[weijian]

Hi Ivan,

It seems that you have analysed SATS as a growth stock, which is expanding it's businesses fast, thus the high PE of 20x - 25x is justified.

Here we are! Using a single number (in this case P/E ratio) to decide whether this is a "growth stock" or not. I assume the opposite of a "growth stock" would be a "value stock"?  And the entire universe of stocks (or its valuation) can be simplified into either "growth" or "value"...



There are probably more than a few ways to skin a cat i suppose. eg. replacement cost or liquidation value. Since SATS is probably worth more alive than dead, we will exclude "liquidation value" out, and this leaves us with replacement cost. As you have alluded earlier, SATS has strong moats and there is a lot of intangible value not reflected in either its earnings (in terms of durability) or book value. Using a single value to classify a company into a single category, is probably not doing much justice, for everyone.

P.S I do own a couple of companies with high P/Es...but I have never thought of them as growth stocks! If i classified them as growth stocks based on high P/E, it would be the tail wagging the dog (in other words, using the result to explain the cause). Personally, I understand their high P/Es is a result of them having durable earnings and "good-quality" free cash flow. The market valued them based on their durable competitive moats (replacement value), rather than valuing them for being able to grow their earnings ("growth stock")

[sillyivan]

Hi Ivan and weijian,

Thank you for you insightful inputs on the Govt support schemes which I have not given a thought to. To be conservative and not to inflate the Op Expenditure and Op Losses, I have actually painted a more rosy picture and used the numbers from full year FY18-19 statements for the back of envelope calculations. If we were to used the latest 9 months FY19-20 numbers vs 9 months FY18-19, the rise of OPEX this year actually increased by 14.1%, out-pacing the 11.2% growth of Revenue, which resulted the Net Profit to decrease by 12% compared to last year results.

Similarly, the 14% Net Margin I have quoted in my previous post is from FY18-19. For 9 months FY19-20, the Net Margin has since fallen to 11.6%. SATS fundamentals has actually started to deteriorate since last year March. Do note that the 9 months FY19-20 numbers ends at Dec 19, which is pre Covid crisis. SATS financial year ends at March.

I have also kept the revenue from non-aviation segment constant in my calculations, where in reality, SATS derives a portion of its non-aviation revenue from MICE food catering.

Since SATS is in a service industry with little physical assets, we know PTB valuation is not meaningful. So what determines its share price is the future earnings and cashflow. As I have commented, at $4, PE 20x, earning yield of 5%, Mr Market is already pricing SATS accordingly to its post Covid19 earnings in a V shape 3-6 months recovery scenario. If these high expectations aren't met or Covid crisis last longer, Mr Market will have to reprice SATS, no?

We can all agreed SATS is a wonderful piece of business. With a solid balance sheet, negligible debt, it will emerge from this crisis stronger than its competitors. So the real question we should be asking is, when will Covid19 be contained worldwide, so people can start flying again. I hope I am certainly wrong, but my feel is that at the rate Covid19 is spreading, it is reasonable to assume it may last longer than SARS (8 months). Even developed countries with world class healthcare system like Spore, South Korea, France, Germany have difficulties containing it. What chances are left for the undeveloped countries?

No worries, we are here to learn from each other viewpoints and have constructive discussions. As you mentioned, in FY2020 SATS will definitely see a dip in revenue/profits and might even go into operating losses. This is a certainty. Because of this certainty, the market has priced this fact in at a 22% cut of its share price to a PE of 20. Otherwise, the fair PE that the market has given SATS was 25. Will the market give you a further discount? No one knows. We have to ask ourselves if a lower PE (TTM) of say 15 be appropriate for approximately 1 year of covid19 downtime. If you think so, then you should probably buy in at $3.

For me personally, I can't predict what will happen but for a monopolistic business like SATS, a PE of 20 is fair. We can't use the FY2020 results to calculate anything because this is a black swan event which constitutes as a one-off event, and does not reflect future earning power. Unless you think future earnings will follow the new trend in FY2020, using FY2020 numbers to calculate intrinsic value is moot.

Also, you mentioned that SATS fundamentals have deteriorated as opex have increased 3% more than revenue and net margins decreased by 2% y-o-y. IF we were talking about a business that is not expanding at such a rapid pace, i would agree that "fundamentals are deteriorating". A good example of such a business is Kingsmen Creatives which is another VB favorite. However, for a business that is busy expanding organically and inorganically into so many different countries, as well as new non-aviation sectors, I would say this is hardly an issue as higher gestation costs are common. It is a similar strategy as Amazon, except that SATS has a much better earning power. Once it has successfully cemented its new positions in Japan, China, Middle East, India etc, we will see a reversal in fortunes. Let's not forget that SATS is constantly hitting the headlines for R&D on better processes and putting emphasis on efficiency. 

If the share price does drop further, I will be definitely be buying more. However, I am comfortable initiating a position in tranches as of now. SATS will have no worries seeing out this covid19 crisis. Of course, if there are any fundamental developments regarding SATS itself or macro worries not related to covid19, then I will have to realign my position. This is purely taking into current situation with the covid19 issues. 

Thanks.

Hi Ivan,

It seems that you have analysed SATS as a growth stock, which is expanding it's businesses fast, thus the high PE of 20x - 25x is justified. That may not be the case. 

SATS Earnings Per Share
FY16: 23.2c
FY17: 23.4c
FY18: 22.3c
FY19: 19.6c (This EPS is estimated since there's only 9 months of record for this year. I have simply used FY18 of 22.3c, discounted by 12%, which is in-line of the decrease of latest 9mFY19 vs 9mFY18 net profit. The actual EPS should be lower than my estimate since Q4 of Jan-Mar will be affected by Covid19.) 

SATS earnings for the past 4 years have been stagnant, at best. 

You mentioned as SATS is busy expanding organically and inorganically, high gestation cost is common, hence perhaps earnings will take off later. But 4 years is not a short period. My feel is that while they are dominant in Spore, they are facing roadblocks at their overseas ventures. 

I can understand your point of view that if a company is expanding fast, gestation cost is high, earnings can remain stagnant or even drop. However, if a coy is indeed expanding, never mind the earnings and expenditures, its revenue y-o-y must grow, yes? 

SATS Total Revenue
FY14: 1753m
FY16: 1729m
FY18: 1828m

I have not used FY19 numbers since it is incomplete. As we can see, for the past 5 years, SATS revenue has only increased by a mere 75m, which works out to be a 0.84% CAGR. Hardly exciting stuff for an expanding coy.

At one glance of such overall numbers you may not see it. 
SATS Total Revenue
FY16: 1698m
FY17: 1729m (+1.8%)
FY18: 1724m (-0.3%)
FY19: 1828m  (+6%)

9M19: 1356m 
9M20: 1508m (+11%)

Why exclude the latest numbers? In 9M2020 (pre covid19 effects) , revenue expanded 11% in a year. The growth is shown to be accelerating in the past 2 years jumping from +6% to +11%. Granted, the numbers are hardly exciting for a growth company. However, numbers do not always show the clearer picture on the ground. Depending on the type of growth you are going for, the numbers can take some time to be reflected. In SATS case, they have gone with M&A with legwork to be done after the acquisitions. The acquisitions give them a base and a reliable local partner. 60 locations in 13 countries so far (in FY2019 report). Many of these are still in their early innings. If you read their annual report, they are in no doubt a growth company. I'm highly impressed by their annual report by the way.

For a 1.8billion revenue company, I would say 11% growth is quite tremendous. These days SaaS/internet companies spoil us, we expect growth to be instantaneous. For brick&mortar companies, organic growth takes time. I have SaaS/internet companies in my portfolio as well as I'm a tech guy. For them, organic growth is merely marketing expenses + clicking on the signup button (in extreme cases). However, how much do you have to pay for such companies? PE 100? Some are not even profitable that you have to use Price/Sales. 

In fact, I believe the market might not even be pricing SATS at PE20 for its growth but rather its monopolistic characteristics. PE20 for growth companies is actually on a low spectrum. For SATS, the growth will be quality growth. The earnings will be quality earning. These take time and I'm willing to wait at PE20 with dividends in my pocket.

EDIT: Note that dividends might be reduced/zero until effects of Covid19 passes

[sillyivan]

Now my question is, do you think most countries govt (first world to third) and their healthcare systems can do what Spore has done, which is to take well-coordinated, swift and decisive actions? If the answer is a resounding yes, then Covid19 will be short lived, maybe eradicated by summer as some experts have pointed out. If the answer is a dismal no, then Covid19 will perhaps be a long drawn battle which may take years (not months) to play out, and it may jolly well be present in mankind forever until a viable vaccine is invented. I hope I am wrong but my thinking is more geared towards the latter answer.

At pre Covid19, SATS PE is 20x at $4. The most optimistic take is its earning will be halved, so PE will be 40x now. However, it can easily bleed money for many quarters before a turnaround of fortune. How can SATS be cashflow positive when global air traffic is not taking off? Forget about the dividends. If there's no earnings, there can be no dividends so as to speak.  

SATS is a wonderful business to own. It's long term prospect is bright. Changi T5, rising middle class of S.E.A, China and India, captain of its industry, competent mgmt, strong economic moats. But at $4 in time of Covid19 crisis, is it a fair price to pay? My take is that it still has plenty of room to fall. The share price must reflect its earnings and cashflow somehow.

What you mentioned abt comparing other countries with SG struck a chord with me. I always remind myself to not use SG as a reference(local/home bias) because in the grand scheme of things, we are just a very small city that we even hv to be mindful of our airspace/ waterways(for the free flow of gds & services), the political parties forming the govts in our neighbouring countries during their elections, being a price-taker, etc. Sometimes, I am not sure what the the media is trying to convey whenever they simply publish country related comparison rankings (be it Covid 19 cases, cost of living, best country to live, etc) without comprehensive background context. It doesn't make sense to simply compare say Jap, China, etc vs small SG.

Other than the healthcare system(infrastructure, manpower, logistics, etc), there could be other challenges to handle in other countries, e.g. :
https://www.mothership.sg/2020/03/batam-...uarantine/
“One of them was already quarantined but then ran away. Another has refused since the beginning and can’t be reached now. They refused to be quarantined because they’re afraid of losing their jobs and income,” Riau Islands Health Agency head Tjeptjep Yudiana said on March 3.

I am in agreement too with your part on the "downstream" effects  like young children, aged parents. Adding to that, for children in child care / primary schools or even living in an estate with a lot of elderly neighbours - it can potentially be a "social" nightmare to deal with.  

There seems to be a possiblity that because symptoms can be mild and common(like sore throat), people may already hv been infected without them knowing. And with the easier transmission, a lot of people cld actually be carrying the virus :
https://www.mothership.sg/2020/03/can-co...singapore/
"Harvard epidemiology professor Marc Lipsitch told the publication that he predicts about 40 to 70 per cent of people around the world will be infected with
the SARS-CoV-2 (the virus that causes Covid-19) within the coming year."

Yes, great in depth discussion on SATs here.

In general, I also have a conservative estimate on 50% drop in earnings when I evaluate my targetted stocks(in general, not just referring to SATS) given the whole world(as welll as the entire supply chain) is probably affected in one way or another. Like what fellow buddies mentioned, I am inclined to think that this covid19 episode is eventually going to pass, and good established companies with a track record will likely resume their earnings & outlooks in 1 or 2 year's time and valuations wld probably fall back to "normal" as well. In my view, the price discounts for equities are somewhat a "short term reaction" to a specific event and may be available for only a small time window(couple of mths ?). Then again, who knows if the mkt then decides on fixating on another event like the US Presidential Election.

For what it's worth, even the great legend himself "took the plunge" recently. I am very surprised because I thought it's too early to buy, especially for an airline business which is probably going to be badly affected.
https://www.foxbusiness.com/markets/buff...e-purchase (Published March 3)
"Buffett spent $45.3 million on 976,507 shares of Delta on Thursday, according to a regulatory filing on Monday, paying an average price of $46.40."

"But no one can tell you this is the time to buy.  Nobody knows."
https://www.oaktreecapital.com/insights/...arks-memos (March 3, 2020)


PS Weijian : Agree it's a gd idea to hv a dedicated covid19 thread, but because I am directly referencing to a post so I parked my comments here. Hope you understand.

Delta Airlines shares have plunged 24% due to covid19. Buffet should be thinking that the drop is unwarranted. Similar to SATS at 22%. If Berkshire was a smaller fund located in Singapore, he could have bought SATS as well.

The headline states "Buffet dismisses coronavirus" and I think he is right in the longer time frame beyond 1 year. Here is well-written article on coronavirus based on facts.
https://slate.com/technology/2020/03/cor...think.html

The world's numbers are highly inaccurate so the best gauge/statistics will come from an accurate source which is Diamond Princess. From the article, "This is where the Diamond Princess data provides important insight. Of the 3,711 people on board, at least 705 have tested positive for the virus (which, considering the confines, conditions, and how contagious this virus appears to be, is surprisingly low)." "On the Diamond Princess, six deaths have occurred among the passengers, constituting a case fatality rate of 0.85 percent. Unlike the data from China and elsewhere, where sorting out why a patient died is extremely difficult, we can assume that these are excess fatalities—they wouldn’t have occurred but for SARS-CoV-2. The most important insight is that all six fatalities occurred in patients who are more than 70 years old. Not a single Diamond Princess patient under age 70 has died."

We need to be thinking about nursing homes, not schools. Hospitals, not planes.

Thanks for sharing dreamybear!

[jfc18]

Hi Ivan,

I have been reading SATS annual reports for the past 10+ years. I was a SATS and SFI shareholder a few years back. Beyond the annual report colourful narrative, I thought the all important Five Years Financial Summary should be used to overlay the narrative, and make sure the numbers tally with the words. The numbers are clearing hinting to me, despite SATS best efforts to expand beyond Spore shores over the years, both topline and bottomline have actually struggled to grow, and keep pace with the rise of share price.

SATS qualitative business merits are well known. So an investor may ask, from a quantitative point of view , why does the market place a premium on its valuation, consistently around PE 20x to PE 25x for past few years before Covid19?

The answer lies in its unbroken record of increasing dividends for the past 6 years.

SATS Stellar Dividend Record 

FY13: 13c
FY14: 14c
FY15: 15c
FY16: 17c
FY17: 18c
FY18: 19c

As we can see, SATS is a darling for Dividend Investors. But is it sustainable? From a rational business perspective, dividends should only be paid out from free cashflow. SATS FY18 free cashflow is $208m which is 18.5c per share, while FY18 dividend is 19c. Henceforth, dividend paid has surpassed its free cashflow in FY18, one year before Covid crisis. Even without Covid, I highly doubt SATS can maintain, let alone increase, its 19c dividend for FY19 as its 9 months profit has already decreased by double digits this year. SATS stellar dividend record which has been one of the big positive for investors, is clearly unsustainable. 

With a stagnant or decreasing dividends on the horizon, sluggish growth of topline and bottomline, should Mr Market reprice SATS lofty valuations? All the numbers I have stated are pre Covid. With Covid hitting hard at aviation industry, investors should even demand more margin of safety on SATS share price to compensate the uncertainties it is facing.

When it comes to annual reports, Numbers, do paint a better picture than Words.

[Behappyalways]

SATS announces further pay cuts, warns Covid-19 expected to 'substantially' impact earnings
https://www.theedgesingapore.com/capital...lly-impact

[sillyivan]

Hi Ivan,

I have been reading SATS annual reports for the past 10+ years. I was a SATS and SFI shareholder a few years back. Beyond the annual report colourful narrative, I thought the all important Five Years Financial Summary should be used to overlay the narrative, and make sure the numbers tally with the words. The numbers are clearing hinting to me, despite SATS best efforts to expand beyond Spore shores over the years, both topline and bottomline have actually struggled to grow, and keep pace with the rise of share price.

SATS qualitative business merits are well known. So an investor may ask, from a quantitative point of view , why does the market place a premium on its valuation, consistently around PE 20x to PE 25x for past few years before Covid19?

The answer lies in its unbroken record of increasing dividends for the past 6 years.

SATS Stellar Dividend Record 

FY13: 13c
FY14: 14c
FY15: 15c
FY16: 17c
FY17: 18c
FY18: 19c

As we can see, SATS is a darling for Dividend Investors. But is it sustainable? From a rational business perspective, dividends should only be paid out from free cashflow. SATS FY18 free cashflow is $208m which is 18.5c per share, while FY18 dividend is 19c. Henceforth, dividend paid has surpassed its free cashflow in FY18, one year before Covid crisis. Even without Covid, I highly doubt SATS can maintain, let alone increase, its 19c dividend for FY19 as its 9 months profit has already decreased by double digits this year. SATS stellar dividend record which has been one of the big positive for investors, is clearly unsustainable. 

With a stagnant or decreasing dividends on the horizon, sluggish growth of topline and bottomline, should Mr Market reprice SATS lofty valuations? All the numbers I have stated are pre Covid. With Covid hitting hard at aviation industry, investors should even demand more margin of safety on SATS share price to compensate the uncertainties it is facing.

When it comes to annual reports, Numbers, do paint a better picture than Words.

Hey jfc, thanks for additional color on the free cashflow. As you have consistently pointed out on all these past numbers, in the near term (0-2 years), there are multiple headwinds for SATS including that its free cashflow is dangerously near the dividend paid out. I am also fairly certain that a dividend cut in the near term is highly probable. Hence, I am fully inline with you in that respect. 

As I mentioned before, the bottomline struggled to grow because of burgeoning costs as they are heavily human capital dependent (staff costs ammount to 55.3%). All other metrics as mentioned by you will be solved if they are able to improve their cost structure. SATS management knows this and have placed huge emphasis on R&D and improving processes through breakthrough technology. 

SATS have made much groundwork into regional and global expansion. Even as of last week they just continued to buy another food supplier in the UK and have stated they are in the market continuing to look out for even more deals. Why are they able to do that? Because their balance sheet is exceptionally strong with close to 0 debt. I am not looking for the share price to re-rate upwards in this downturn. 

The reasons for buying now are not for the immediate outlook but rather for the outlook 3 years out from now.
1) The groundwork will have been done to be major players & first movers in all their new territories (increase in topline)
2) The R&D for better processes will see an increase in revenue generated/staff, they are measuring exact numbers for this (increase in bottomline)
3) Post covid19, travel is an industry that wont just see "numbers return to normalcy" but rather we will be looking at a backlog burst of demand

Would love to know in your opinion whats a reasonable valuation? As you mentioned, all the current headwinds through the numbers you showed portrayed a deteriorating company that does not deserve its current valuation. If you think PE ratio in FY2020 will be 40x and 20x is too much to pay for a company like SATS, are you saying SATS should be valued at say $1.50 at 15x PE ratio for FY2020 numbers? Or are you in a short position (which is actually super lucrative in this market environment)?

For me, I have pulled my trigger today. Personally, a 25% discount from $5.10 in January to $3.80 today is a good enough discount. I dont think their fundamentals have changed that much. However, I might also be very wrong and really bad at rating discounts and timing the market. I just see what I like, and willing to pull triggers in a sea of blood. Will be looking for more points of entry as the next couple of weeks come.

[jfc18]

Hi Ivan,

As I have mentioned, despite SATS best efforts to expand their overseas operations over the years, the end results are just unconvincing. It is akin to playing football. You may have over 80% of possession, created numerous chances and shots on target in a match, but if you don't score, you don't win. At the end of season, the league table will show where you stand. In football parlance, the league table (SATS financial numbers) doesn't lie.

I have already covered a fair bit on their stagnant earnings, free cashflow, revenue, and unsustainable dividends in my previous posts.

Lets take a look at its balance sheet. While SATS current balance sheet is still considered strong, it has been steadily deteriorating over the years too.

SATS Weakening Balance Sheet (Current Asset - Total Liabilities)

FY15: +289m
FY16: +268m
FY17: +154m
FY18: +119m
Latest Q3, Dec 19: -163m

To be fair, its Debt to Equity ratio is still low. Hence by looking at the above numbers alone, there isn't really a cause for concern. However, if you pluck out all the important numbers from P&L, Cashflow Statement and Balance Sheet over a 5 years period, it clearly showed that SATS is a football club good at winning matches at its home ground, but consistently loses or draws matches at away ground. Mr Market has been evaluating SATS football club as a top 4 Champions League team, where in reality, it is just a mid-table team, no thanks to its poor away form. 

For me personally, I will only pay a maximum of 6% earning yield for all of my stock purchase. That works out to be PE 16.7x. Despite SATS downtrending numbers, its business remains solid enough for me to pay up the 16.7x multiple. The average EPS for past 4 years is 22.2c. 
16.7 x 22.2c = $3.71

To compensate for Covid uncertainties and the fact that SATS may be looking at operating losses with zero dividends for 1-2 years downtime, I will demand a 20% Margin of Safety from my buying price.
$3.71 x 20% discount = $2.97

If I use free cashflow to overlay my calculation above, the end result is pretty smililar. Free cashflow average over the past few years is around 200m. That works out to be 18.5c. Since free cashflow is high quality earnings, I am willing to pay 20x for it. 
20 x 18.5c = $3.70
$3.70 x 20% discount = $2.96

To be entirely honest with you, I will only acquire SATS if the share price hits $3 or below. I could be wrong, the share price may not hit $3 or even close. But with so many cheap bargains around, I wouldn't mind to miss this boat flight. At the end of day, the league table doesn't lie.