SATS

[BRT]

certainly it would be better for shareholders if the discount were from share price when planned rights announcement was made, but sadly the market spoke first with the 30% plunge so theyll have to tag it to more recent prices (e.g. 3/6 month VWAP).

[CY09]

The allocation of the rights is at 323 shares for every 1,000 shares. It is a very difficult ratio for shareholders to stomach.

Pricing wise, it is at $2.2 per rights. That is a 50% discount from the time the proposed rights was announced.

Market didnt take the news well.

[weijian]

I thought the portion about changing customer behavior is pretty alarming. In the years ahead, will SATS follow the fate of another fallen aviation favorite SIA Engineering?

7 things I learned from the 2023 SATS AGM

7. During the AGM, many shareholders questioned the board as to why SATS has been unsuccessful in achieving post-pandemic profitability, unlike its sister company, SIA. Mok had provided 3 main reasons for this:

SATS focuses on building lasting customer relationships on long-term contracts. Due to inflationary pressures, the net income of SATS’s catering business has experienced diminishing returns as the company is unable to quickly update prices due to the longevity of contracts. Mok proclaimed that the company will be taking a long-term approach in remedying this, adjusting prices in a fair and transparent manner to ensure acceptable margins yet still bring value to their customers.

Aviation is the largest sector in SATS’s food business. The company’s inflight catering business operations have not returned to pre-pandemic levels. Mok explained that ‘not every airline has restored the SATS food offerings that they used to offer on board.’ Furthermore, there has been an increasing occurrence of ‘double-catering’; certain airlines have begun to employ the services of inflight caterers from their home markets alongside that of SATS. These two factors equate to a reduction in demand for SATS’s inflight catering, hence lowering the business’s profitability.

The aviation industry has not fully returned pre-pandemic levels. However, as mentioned earlier, aviation passenger traffic is expected to reach 100% of pre-pandemic levels in FY2024. Mok shared that a large sum of air cargo is stored and flown on the belly of passenger aircrafts. Hence with more flights come higher capacity for air cargo and the eventual recovery of SATS’s air cargo business.

https://fifthperson.com/2023-sats-agm/

[d.o.g.]

I thought the portion about changing customer behavior is pretty alarming. In the years ahead, will SATS follow the fate of another fallen aviation favorite SIA Engineering?
<snip>

1. SIA EC had different issues:

i. Shift from 4-engine (B747, A380) to 2-engine planes (A350, B777, B787).

This obviously halved the amount of work per plane. Not SIAEC fault.

ii. Improved reliability of engines

No engine manufacturer will sell a new engine that is less reliable i.e. maintenance intervals increase. This translates to fewer workshop visits over the engine's lifetime. Not SIAEC fault.

iii. Competition from engine manufacturers

Rolls Royce went into leasing, and thus doing their own maintenance, which means they took those workshop hours directly away from SIAEC. Not SIAEC fault.

For (i) and (iii) the loss in revenues has already happened. (ii) is an ongoing issue that has to be offset by continued growth in total flight hours.

During Covid, SIAEC's pristine balance sheet (no debt, lots of cash) enabled it to survive even with basically no business. Business recovery will depend on airlines resuming their flight schedules. SIA is basically back to pre-Covid levels, other airlines should be back this year or next year.

Longer term, SIAEC is dependent on both SIA and regional airlines i.e. ASEAN. North Asia (China, Japan, Korea) already has maintenance companies e.g. HAECO, Lufthansa Flugtechnik, Air China-RR JV, GAMECO etc.

2. SATS issues are rather different and relate primarily to capital allocation.

i. Acquisition of SFI

The deal was almost certainly a non-commercial decision, with zero synergy with the airport catering business. Nobody is going to use SATS' kitchens at Changi to cook food to be transported to army camps, nor vice-versa. And SATS' own purchasing volume is large enough that SFI couldn't possibly get it to the next level of purchasing discounts.

ii. Pig farms in Jilin

Another head-scratcher. SATS is not shipping pork from Jilin to Singapore for use in its catering operations. And running an airport kitchen has nothing to do with running a pig farm. Zero synergy.

iii. TFK, GTRH etc

The acquisition of smaller catering/handling businesses overseas also made no sense. SATS' own experience dominating Changi should have made it obvious that the incumbent has tremendous cost (and therefore profit) advantages i.e. unless you can buy the top player in a given airport, don't bother. dnata for instance has been a perennial 2nd player at Changi since 2004 and has made basically zero progress. Swissport tried to be the 3rd player at Changi and quit after 4 years and $50m in losses.

iv. WFS

WFS has had 5 owners in less than 20 years, 4 in the last 8 years alone.

pre-2006: Vinci
2006-2015: LBO France
2015-2018: Platinum Equity
2018-2023: Cerberus
2023-now: SATS

There were 3 private equity firms between Vinci and SATS. I wonder why Platinum and Cerberus were so quick to sell. Did they find that WFS wasn't all that great once they'd bought in and picked off the low-hanging fruit?

SATS didn't get a bargain either, paying 9.7x EV/EBITDA for a business that's presumably already had all the fat stripped from it by previous owners. So there's likely little scope to improve EBITDA by reducing waste or improving operations.

===
So in conclusion, SIAEC's problems are outside their control. SATS' problems are largely self-inflicted. YMMV.

[SRI]

There is a good article on Business Times about how Air Cargo demand is softening. https://www.businesstimes.com.sg/interna...-air-cargo That makes the timing of the WFS acquisition even worse.

[weijian]

QoQ, we are seeing better revenue from WFS. EBIT has turned positive for WFS, hence resulting in positive PATMI in 2Q14 (It was negative in 1Q24). Will SATS (as an operator themself) do better than WFS's previous PE owners?

1H FY24 Business Update

• 2Q EBITDA (+SoAJV) improved by $38.0M to $217.6M with margin reaching 17% (1Q FY24: 10.6%).

• 2Q FY24 PATMI = $22.2M, improving by $52.1M from $29.9M of losses last quarter. Compared to 2Q FY23, PATMI improved $32.0M from $9.9M of losses.

• For 1H FY24, PATMI losses stood at $7.8M loss, a $24.7M improvement from 1H FY23 losses of $32.5M.

• SATS integration with WFS is on track. Re-financing has unlocked S$40M annual interest savings and cashflows; numerous successful wins have been secured i.e. Bengaluru, Chicago Terminal and new airline contracts with commercial and network alignment; and ongoing operational excellence initiatives with streamlined organization effectiveness.

https://links.sgx.com/FileOpen/SATS%201H...eID=777855