Just like the rest of the aviation sector, when the pandemic broke out, investors flew the coop on Sats, sending its share price down by half from about $5.10 before the Covid-19 pandemic, to a low of $2.52 during the selloff on March 23, 2020.
Two years on, with vaccination and the gradual reopening, shares of Sats have recovered as well. On April 27, it closed at $4.63, valuing the airport ground-handling and in-flight catering service provider at $5.2 billion.
The rise in the share price is backed by investors’ optimism with the improving numbers. For the most recent 3QFY2022 ended Dec 31, 2021, Sats reported revenue of $307.8 million, up 22.6% y-o-y. Patmi came in at $5.1 million, a reversal from a $2.8 million loss in the same period a year before. If government reliefs were stripped out, Sats would record a loss of $33 million, compared to a $52.8 million loss in 3QFY2021.
Analysts such as Roy Chen of UOB Kay Hian expect Sats to turn profitable for FY2023 ending March 2022, and to resume paying dividends. The company, along with the rest of the sector including Singapore Airlines (SIA) and SIA Engineering, is seen to recover to pre-Covid levels towards the end of 2024, which is just before FY2025 ending March 2024 for the three companies.
As the ground handler, Sats has built up an extensive catering infrastructure not only in Singapore, but also across the region where it operates. Besides cooking and packing meals for SIA, it does so too for many other airlines flying in and out of Changi Airport.
In addition, Sats has a sizeable so-called “institutional catering” business serving army camps, hospitals, and various other large organisations. It has also expanded its offerings up and down the stream via subsidiaries operating different brands, such as Country Foods and Monty’s Bakehouse.
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The diversification into the non-aviation food segment had shielded Sats from the worst of the pandemic. Nevertheless, CEO Kerry Mok sees Sats occupying a unique intersection of food and aviation, and that this is a domain “core” to the company which must be preserved.
“I think keeping to a core for food is important, keeping the core in aviation know-how is important… not many people have [this skillset] and we cannot afford to lose that know-how,” says Mok in an interview with The Edge Singapore.
Customers’ customer
See also: SIA posts passenger traffic growth of 15.8% in December operational update
To further beef up its capabilities in food production, Sats broke ground on April 7 for a $150 million Food Hub in the Jurong Innovation District. When completed in 2024, the facility will have a gross floor area of 20,000 sq m. Within this facility, Sats will deploy automation and robotics to make its existing production processes more efficient. For example, processes within the hub will be networked with the Internet of Things (IoT) technology to provide data that will aid planning, increase asset utilisation and reduce food waste.
Large-batch production of meals will be automated to achieve efficiency while certain manual processes such as meal assembly may be carried out by robotic finger grippers and auto- dispensing units for various food components. With this facility, Sats aims to capture a bigger share of the overall food business, not just for airline customers, but also outside of aviation. “Whether it’s aviation or non-aviation, it’s still food,” reasons Mok.
Groundbreaking ceremony for the $150 million Sats Food Hub in the Jurong Innovation District on April 7.
From left: Tan Chuan Lye, chairman of food solutions, SATS; Kerry Mok, SATS president and CEO ; Gan Kim Yong, Minister for Trade and Industry; Tan Boon Khai, JTC Corp CEO; and Goh Siang Han, chief operating officer of food solutions, SATS. (Photo: The Edge Singapore/Albert Chua)
Indeed, the company has been playing a nexus role in this food business. Besides producing the food, Sats is bringing on board well-known hawkers and helping to reproduce their famous dishes for passengers.
For example, Sats has helped homegrown brands such as Song Fa Bak Kut Teh, Qiu Lian Ban Mian, and Boon Tong Kee to bring their signature dishes to the skies by adapting and producing them at a volume required for hungry passengers paying for SIA’s First and Business Class cabins.
Such a move is part of its Foodflix programme, where Sats helps local hawkers and F&B brands to internationalise while expanding the group’s portfolio of branded food solutions and non-travel food business.
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This means that Sats will provide culinary consultation and product innovation opportunities for brand owners to experiment, adapt and scale recipes that are typically cooked on demand but with their consistency maintained. Besides inflight service, Sats expects to move the meals via other venues such as ready-to-eat meals and food delivery.
Under another programme, Sats has ventured further downstream to run its own pasta restaurant, Twyst. All the food served at this busy Raffles Place location comes from its central kitchens, before being prepared and served to diners at the restaurant itself.
For Sats, operating the restaurant is a venue to have direct feedback from consumers, and learn from them the current trends and preferences of different demographics. By doing so, explains Mok, business customers can benefit too as Sats is better positioned to advise them on what consumers want.
In a way, Sats is “helping its customers’ customers” — a mantra Mok laid down even before he took over the helm of the company on Jan 1 from Alex Hungate, who went on to become the chief operating officer of Grab Holdings.
When Sats services a customer, Mok aims to not just help that customer, but also help create value for its downstream customers by putting itself in its shoes.
Non-food, non-aviation
To be sure, Sats is more than food. Its gateway services span airfreight, baggage and ramp handling, passenger services, aviation security, cargo handling, and even cruise handling and terminal management.
As passenger traffic dropped, the “non-human” portion of the airline industry increased — specifically, cargo. “Cargo continues to be strong for us,” Mok says, adding that with supply chain disruptions around the world, such as port lockdowns in Shanghai and a potential strike on ports on the US West Coast, these challenges will continue to pose a challenge to ocean freight that will not be resolved soon.
According to DHL’s Airfreight State of the Industry report released in March, demand for air freight in January 2022 grew by 12% y-o-y, but capacity will remain tight due to the high cost of jet fuel and the Ukraine-Russia conflict, which have closed airspaces.
Belly capacity — referring to cargo capacity carried in the belly of planes — are still 26% below pre-Covid levels, and capacity recovery is still fluctuating due to recent service disruptions, flight cancellations and re-routings.
These closures have taken “significant” capacity out, especially outbound capacity from the EU, which means that there is added pressure on rerouted trade lanes. Most notably and beneficially for Sats, global freight rates remain high, standing at 107% above 2019 levels and 35% higher than 2020 levels.
Mok believes that Sats is “well placed” to capitalise on this. In a sign of confidence, the company on Feb 23 announced it is bringing its stake in Asia Airfreight Terminal Co (AAT) to 65.4% by paying HK$339.5 million ($58.5 million) for an additional 16.4% stake. AAT is located at Hong Kong International Airport and offers services such as cargo handling and documentation processing.
Mok explains that the move is significant, because Hong Kong is the second largest air cargo hub in terms of volume tonnage, and Sats sees growth opportunities there. “So, by increasing [our stake], we’re making a statement that it’s important for us and more importantly, we can tap on a lot more e-commerce in Hong Kong and across the border in Shenzhen.”
But as more border restrictions are loosened, Mok is cautiously optimistic. He notes that while generally passenger travel is opening up, it is uneven across the world, and surprises may crop up. “We’re always watching out for what’s the new Covid-19 variant, watching which country is going to shut down, and of course, the war in Ukraine didn’t help,” he says.
Nevertheless, Mok believes Sats is in a “better environment” now compared to the same time last year. For example, the year-end holiday season is expected to benefit the company as people, cooped up for the better part of two years, go abroad again. To support the recovery, the company has brought back more staff and as such, costs can be expected to go up “for a while” and at a pace slightly faster than revenue growth. “We’re doing this in preparation for the growth that we expect to come,” says Mok.
In its 3QFY2020 ended Dec 31, 2019, just before the pandemic hit, the ratio of aviation to non-aviation-related revenue for Sats was approximately 80:19. Its long-term aim is a 65:35 mix. While the Sats’s DNA is “very much aviation”, Mok says, he believes that focusing on the non-travel business puts the company in a position to be more resilient. “Even in the future, if there is another pandemic, we will be in a much more diversified position to ride this through,” says Mok.
