SATS

[sillyivan]

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.

If you like a football analogy, I'd like to get some kicks out of it too. In my opinion, SATS isn't a mid table team. Rather they are a title winner but are seeing recent poor run of results due to team rebuilding. Even with recent poor results, it is only challenging its own league points tally year after year as there is not a close title contender playing the kind of football they are playing. Somewhat like the Bundesliga. They will be challenging their record points tally again soon enough, after shoring up weak positions by promoting new youth academy stars, scouting for new stars, and also eliminating high wages. 

I would say in normal market conditions, it will be extremely tough to get SATS at PE 16.7x. However in this market sentiment, your personal rule of PE 16.7x + targeted share price of $3.71 would coincidentally be highly possible and very probable. In the grand scheme of things, that is only a 3-7% difference to my initiation price of $3.85-$4. $3.71 is also above some of my targeted buying tranches. I doubt we will see $2.97(in my personal opinion) but if we do, I'd be scooping up shares like how refineries will be scooping up gallons of crude now. 

By the way, The Edge reported "Airport passenger traffic in Asia-Pacific set to plunge 24% in first quarter". I was expecting it to be closer to 50-70% in the first quarter AND about 50% in the second quarter considering how we've been seeing doomsday headlines everyday. 

You mentioned that there are many "cheap bargains" around. On the other hand, I have been hard-pressed to find any quality stocks in SGX. Which other stocks do you fancy then?

[mobo]

In my opinion, SATS isn't a mid table team. Rather they are a title winner but are seeing recent poor run of results due to team rebuilding. Even with recent poor results, it is only challenging its own league points tally year after year as there is not a close title contender playing the kind of football they are playing. Somewhat like the Bundesliga. They will be challenging their record points tally again soon enough, after shoring up weak positions by promoting new youth academy stars, scouting for new stars, and also eliminating high wages. 

That’s a very bold claim. Can you explain why you think SATS is a top of the league company despite the lack lustre financial performance (thanks jfc18 for compiling) for the past few years? What are the qualitative factors that cause you to believe it is one of the best companies around?
 
From a big picture point of view, SATS does not seem to have followed a very different trajectory compared to most Temasek companies. It started off as a subsidiary of SIA, deriving most of its revenue from what is effectively a natural monopoly of SIA/CA affiliated businesses before Temasek decided to spin it off as a separate entity while maintaining major ownership.
 
Since then, it has done 2 major acquisitions in SFI and TFK. SFI though with a lot of overseas subsidiaries, seems to be deriving most of its margins again in Singapore. I see no real evidence that this has changed significantly since rolling into SATS, but it is hard to tell as we can’t drill down to the level of granularity especially when all the results are presented as co-mingled with existing SATS operations.
 
As for TFK, it seems to be trudging along with the usual ups and downs expected of the aviation industry. While this acquisition is no lemon, I do not see any mind blowing manoeuvres here either. Some of the minor diversifications started off with a lot of fanfare (e.g. cruise management), but had no subsequent follow ups, so I can only assume that the outcome hasn’t been fantastic either. A lot of the past AC/JV investments were touted as small ventures leading to greater things as well, but so far nothing of significance in terms of revenue or profitability either.
 
If one looks at SATs over the past decade, they are a decently run company which attempted to diversify their business overseas and outside aviation with a mixed bag of small successes and minor failures. Their diversification attempts are reminiscent of other Temasek subsidiaries, a constant struggle with mediocrity once they exit their natural sphere of familiarity.
 
It has a certain size and core business defensibility and coupled with generally good governance as a Temasek company makes this a suitable investment for people who prefer slow and steady growth with limited downside, but I seriously doubt it is anywhere near “title winner only challenging its own league points tally year after year as there is not a close title contender” regardless of whatever qualitative or quantitative benchmarks chosen.

[sillyivan]

That’s a very bold claim. Can you explain why you think SATS is a top of the league company despite the lack lustre financial performance (thanks jfc18 for compiling) for the past few years? What are the qualitative factors that cause you to believe it is one of the best companies around?

Hi mobo, plenty of color has been given on the qualitative factors of why I believe SATS is one of the best companies around if you read the past 2-3 pages of the thread. I don't think regurgitating those points would change your mind if you dont see the same. As for lacklustre financial performance, I find it very difficult to comprehend how do I deem a company who churn out relatively consistent revenues, relatively consistent profits, relatively consistent free cash flow with relatively consistent negligible debt, "lacklustre"? 

It has a certain size and core business defensibility and coupled with generally good governance as a Temasek company makes this a suitable investment for people who prefer slow and steady growth with limited downside, but I seriously doubt it is anywhere near “title winner only challenging its own league points tally year after year as there is not a close title contender” regardless of whatever qualitative or quantitative benchmarks chosen.

Can you advice who are SATS' competitors playing in the same league as them and what are their current market share? I might have missed out important details here and would appreciate it if you have good info to share if any company posts a threat to SATS' otherwise rather high quality of earnings. And that I believe is what commands the premium in PE.

From a big picture point of view, SATS does not seem to have followed a very different trajectory compared to most Temasek companies. It started off as a subsidiary of SIA, deriving most of its revenue from what is effectively a natural monopoly of SIA/CA affiliated businesses before Temasek decided to spin it off as a separate entity while maintaining major ownership.
 
Since then, it has done 2 major acquisitions in SFI and TFK. SFI though with a lot of overseas subsidiaries, seems to be deriving most of its margins again in Singapore. I see no real evidence that this has changed significantly since rolling into SATS, but it is hard to tell as we can’t drill down to the level of granularity especially when all the results are presented as co-mingled with existing SATS operations.
 
As for TFK, it seems to be trudging along with the usual ups and downs expected of the aviation industry. While this acquisition is no lemon, I do not see any mind blowing manoeuvres here either. Some of the minor diversifications started off with a lot of fanfare (e.g. cruise management), but had no subsequent follow ups, so I can only assume that the outcome hasn’t been fantastic either. A lot of the past AC/JV investments were touted as small ventures leading to greater things as well, but so far nothing of significance in terms of revenue or profitability either.
 
If one looks at SATs over the past decade, they are a decently run company which attempted to diversify their business overseas and outside aviation with a mixed bag of small successes and minor failures. Their diversification attempts are reminiscent of other Temasek subsidiaries, a constant struggle with mediocrity once they exit their natural sphere of familiarity.

Thanks for providing the history of SATS. I think it is important to know the history but even more important to look forward. There lies another difference. I am bullish on that they will succeed in their overseas expansion but you are not. I think of the overseas expansion as something to look towards, but I guess in your opinion they are already a failure. I also feel that being a "Temasek subsidiary" has no bearing on the respective success or failure of all the different companies.

[jfc18]

Hi Ivan,

This is a forum that thrives on honest opinions and exchange of ideas. Since you have asked me, i have no qualms on sharing the coys which i have bought recently. 

DBS
UOB
OCBC
Great Eastern
Jardine Cycle and Carriage
Singapore O&G

[sillyivan]

Hi Ivan,

This is a forum that thrives on honest opinions and exchange of ideas. Since you have asked me, i have no qualms on sharing the coys which i have bought recently. 

DBS
UOB
OCBC
Great Eastern
Jardine Cycle and Carriage
Singapore O&G

Thanks jfc18, appreciate that. Having opposing views on 1 company does not make us enemies. Correct a fool and he'll hate you, correct a wise man and he'll appreciate you. I hope all of us are wise men here. Only by learning from each others' viewpoints can we improve ourselves. Will be having additional homework to do on these 6 companies!

[weijian]

hi guys,
Thanks for demonstrating the VB spirit of quality and objective discussion. This is what differentiates this forum.

At the end of the day, while most of us are looking for social proof, we probably do better if we stand ready to be corrected. This is the only way to get better, slowly but surely, as Charlie Munger espouses.

Also interesting to see that while we look at the same data, we see different things at times. It is all a result of our upbringing and experiences that shape our current biases.

Moderator

[jfc18]

Hi Ivan,

This is a forum that thrives on honest opinions and exchange of ideas. Since you have asked me, i have no qualms on sharing the coys which i have bought recently. 

DBS
UOB
OCBC
Great Eastern
Jardine Cycle and Carriage
Singapore O&G

Thanks jfc18, appreciate that. Having opposing views on 1 company does not make us enemies. Correct a fool and he'll hate you, correct a wise man and he'll appreciate you. I hope all of us are wise men here. Only by learning from each others' viewpoints can we improve ourselves. Will be having additional homework to do on these 6 companies!

Hi Ivan,

Most of my posts on SATS are backed with numbers from the latest Five Years Financial Summary. I hope you wouldn’t find my posts too blunt and offending. If they were, my sincere apologies to you. 

In all honesty, I am not trying to bash down on SATS or take you on personally. Valuebuddies is a great forum for investors. I have gained useful insights from your frank opinions too. 

Anyway, the above six coys are definitely not buy calls. The cheap can get cheaper in a crisis, so I am buying shares in tranches. I think you already know by now that I am not betting on a V shape recovery. 

Best of luck to you!  

[Retired@52]

2009 - My wife bought SATS at $1.67 per share.
2019 - the price was about $5.50 per share. I asked her to sell but she refused.
2020 - She collected a total Dividends of $1.79 which mean she had collected back her Capital.
When we heard about the “COVID-19”, we had a serious discussion, as this is a travel related stock, she agreed to sell it.
She sold it on 03-02-2020 at S4.51 per share. Almost making a 6-figure profit.

She still like this share. She asks me whether she can buy and average it on the way down”. I said “NO”.
I told her that when the COVID-19 subsides and this stock reaches the bottom then she may buy back.
She asked me whether I would join her in acquiring this stock. I said base on history, I’ll buy at about $2.50.

STI History:

Year                   STI Index          Down         % Lost       Reason
1973 to 1974       500 to 200        - 300         66%          Oil Crisis
1981 to 1985     1000 to 500        - 500         50%          Pan-Electric Collapsed
1987 to 1988     1500 to 800        - 700         46%          Black Monday
1996 to 1998     2600 to 900        - 1700       65%          Asian Currency Crisis
1999 to 2001     2500 to 1300      - 1200       48%          September 11 Attack
2007 to 2009     3800 to 1594      - 2206       58%          Sub-Prime Crisis
2019 to xxxx    3500 to xxxx        - xxxx        xx%          COVID-19 or what?

E & OE

[dreamybear]

Hi Ivan,

This is a forum that thrives on honest opinions and exchange of ideas. Since you have asked me, i have no qualms on sharing the coys which i have bought recently. 

DBS
UOB
OCBC
Great Eastern
Jardine Cycle and Carriage
Singapore O&G

Thanks for sharing - the above list contains gd solid blue chip stocks which remind me :
dreamybear during younger days, once had a dream to just own a single stock(either DBS, UOB or OCBC) in CDP a/c, enough to pay abt $50k in annual dividends(any share lending fees wld be a bonus). Of course, that wld cost abt $1m and probably mean staying in HDB and without car ownership(more convenient for the whole family) for life. However, as I got to exchange ideas with investors, read more widely(such as this forum) and gain more work/life experience, I now view things differently.

For what it's worth, it may be worth considering the valuations of other banking giants like HSBC, Standard Chartered, Barclays, ICBC, Bank of China, Bank of America, etc when considering all 3 local banks. Some world class banks are trading at low PEs and below book value currently, and cld provide a source of diversification.

2009 - My wife bought SATS at $1.67 per share.
2019 - the price was about $5.50 per share. I asked her to sell but she refused.
2020 - She collected a total Dividends of $1.79 which mean she had collected back her Capital.
When we heard about the “COVID-19”, we had a serious discussion, as this is a travel related stock, she agreed to sell it.
She sold it on 03-02-2020 at S4.51 per share. Almost making a 6-figure profit.

She still like this share. She asks me whether she can buy and average it on the way down”. I said “NO”.
I told her that when the COVID-19 subsides and this stock reaches the bottom then she may buy back.
She asked me whether I would join her in acquiring this stock. I said base on history, I’ll buy at about $2.50.

STI History:

Year                   STI Index          Down         % Lost       Reason
1973 to 1974       500 to 200        - 300         66%          Oil Crisis
1981 to 1985     1000 to 500        - 500         50%          Pan-Electric Collapsed
1987 to 1988     1500 to 800        - 700         46%          Black Monday
1996 to 1998     2600 to 900        - 1700       65%          Asian Currency Crisis
1999 to 2001     2500 to 1300      - 1200       48%          September 11 Attack
2007 to 2009     3800 to 1594      - 2206       58%          Sub-Prime Crisis
2019 to xxxx    3500 to xxxx        - xxxx        xx%          COVID-19 or what?

E & OE

Thanks for sharing. Wow, hv not experienced those earlier crisis before - it seems an average of abt 50% downside => still some way to go in the current cycle(not taking all the recent money printing into consideration).
My key learning points :
1. SATS has not been on my watchlist; coz didn't know it was such a gd opportunity. Plus, with so much recent in-depth discussion on it over here, I have now placed it on my watchlist.  
2. Do not let crisis opportunities go to waste - how many do we have in our lifetime ? These calamities may be beyond our control but we can try our best to utilize it to our advantage.

Wishing all buddies all the best in picking up your dream stocks at your dream prices.

[karlmarx]

Panic is setting in. Both good and bad stocks are getting sold aggressively.

Dream stocks at dream prices will likely come soon.