Tan Chuan Lye tucks into the double-boiled chicken soup with gusto and encourages his guests to help themselves to the buffet prepared by the SATS inflight catering kitchen. The new president and CEO of airport handling and food services provider SATS tells The Edge Singapore how he sometimes puts pressure on its chefs by coming back with new menu ideas from the restaurants he has visited.
Indeed, inflight catering is dear to Tan's heart. He says it was where he started his career with SATS more than 30 years ago, as a social science graduate from the University of Singapore, after telling the interviewer his hobby was cooking.
Of course, by the time he was appointed CEO of the group this March, Tan had gone through the spectrum of services that SATS provides, including ground-handling and passenger services.
Now, he's refocusing the group's growth through expanding its services outside the aviation industry, although he still keeps a close eye on opportunities in the sector.
"We think there are still prospects in aviation," he says.
For FY2012 ended March, nearly 84 percent of SATS' revenues came from the aviation industry, compared with just over 80 percent in FY2011. This was due to the lack of a contribution from Daniels Group, the UK food manufacturer that SATS sold in October. The disposal also meant that earnings fell 10.7 percent y-o-y to $170.9 million, although revenues grew 24 percent to nearly $1.7 billion from a year ago. Excluding one-off expenses and Daniels' contributions, earnings fell 4 percent to $177.5 million.
However, the sale also meant that SATS was able to pay out a special dividend of 15 cents, in addition to a final dividend of 6 cents. This led to a full-year payout of 26 cents a share, or a yield of about 10 percent. The generous dividend, as well as better-than-expected earnings, helped SATS gain more than 3 percent from the close the week before the announcement on May 14.
Can shareholders expect bigger payouts? Or is Tan lining up another acquisition to help SATS grow?
SATS started out as a wholly owned subsidiary of Singapore Airlines in 1972, as the national carrier sharpened its focus on the airline business. Tan came on board in 1976, when "in those days lobster thermidor was served in economy class as well." Soon after, he was tasked with helping to develop new inflight kitchen operations as SATS prepared to move from Paya Lebar to the new airport at Changi. Tan was sent around the world to research best practices. In 1981, when the new SATS kitchen opened, certain operations were already automated.
"We were the first to have the driverless machine to transport crockery around the kitchen," he recalls with pride.
SATS went public in 2000 and in 2009, Singapore Airlines divested its entire stake. Today, SATS handles about 80 percent of scheduled flights and nearly 60 airlines at Changi Airport, and has operations in 36 airports in 10 countries around the world. In 2009, with the growing low-cost-carrier presence, SATS established wholly owned subsidiary Asia-Pacific Star to offer low-cost ground-handling services. The company has also diversified from the aviation sector and established food businesses in Singapore, Australia and China.
Still, SATS' growth is inexorably tied to Changi' s rise as an air hub. In 4Q2012, the number of passengers handled by SATS grew 10 percent y-o-y to 9.7 million, slightly lower than Changi' s 13 percent growth in passenger throughput, largely because SATS does not handle Air Asia's passenger traffic, for example, according to analysts.
On a full-year basis, SATS handled 37.9 million passengers, 7 percent more than the year before. It handled 115,000 flights, an increase of 11 percent. Unit services rose 9 percent to 91,500, while the gross number of meals produced was up nearly 6 percent to 26,500. Earlier this year, Changi Airport Group said it managed 46.5 million passengers and 302,000 aircraft movements during the year ended December 2011.
Four out of seven contracts that SATS won recently were also related to airlines at Changi. These included ground and cargo handling for Air China Cargo, and catering and laundry services for Bhutan's Drukair. SATS also added ground handling to its services for Lufthansa, and will offer the full suite of services "from ground handling to catering and flight operations" to Scoot, which starts operation next month.
Tan says the group is also looking for opportunities to expand its gateway and flight-catering services outside Singapore. In November 2010, SATS acquired a 50.7 percent stake in Japanese airline caterer TFK Corp. Although the March 2011 earthquake disrupted operations at TFK, the unit has since managed to record earnings of $500,000 for 4Q2012, reversing the $200,000 loss a year earlier.
Meanwhile, the focus now is on expanding operations in China and the Middle East. SATS is on the lookout for jobs in the second- and third-tier cities as Tan admits it may be difficult to muscle in on the top city airports in China, apart from Beijing, where SATS runs two joint ventures, Beijing Ground Services and Beijing Airport Inflight Kitchen.
It is also building its second flight kitchen in Saudi Arabia while also looking out for ground-handling contracts.
Growth Engines
However, Tan is realistic about the inroads SATS can make overseas in the aviation industry, which remains a tightly regulated sector. The aviation business is highly cyclical and the current economic climate, for instance, has led to a slump in cargo activity, which impacted SATS' earnings. Furthermore, squeezed by keener competition and higher fuel prices, airlines can no longer operate the way they used to, he adds.
"Airlines are under much more pressure now," he adds. "Ticket prices have come down, and likewise the budgets for services. As part of his career development, Tan had spent a couple of years at SIA, procuring services for the carrier. "In those days, budget was not the issue. You give me premium service and quality, I give you a premium price."
As such, the group has been expanding its services in gateway handling and catering in the non-aviation sector as well.
Last December, SATS won the bid to manage and operate the upcoming International Cruise Terminal at Marina South, in a joint venture with a Spanish cruise terminal operator. Earlier in 2011, SATS had linked up with Star Cruises and Changi Airport, as well as Royal Caribbean Cruises, to provide cruise-fly services, which facilitate the movement of travellers and their baggage between the airport and the cruise ship.
"It's something that our competitors cannot offer, such seamless travel," Tan says. He adds that other upcoming cruise terminals, such as in Hong Kong and Shanghai, could provide SATS with opportunities to expand.
As for the food business, SATS has been growing its institutional catering business after its acquisition of Singapore Food Industries (SFI) in 2009. Besides contracts with the Singapore Armed Forces, SFI has also catered for large-scale events such as the Youth Olympics in Singapore, and Tan is keen to secure more such contracts.
"So our growth going forward would be in non-aviation, particularly food, because there are a lot of opportunities out there that we've not been able to seize,"he says, adding that there are opportunities in schools and hospitals as well.
Additionally, SATS is moving into so-called remote site catering, or delivering meals to workers at mining and construction sites and oil rigs. For the next four to five years, the CEO expects at least 30 percent of revenue would be from the non-aviation sector.
Tan declines to give specifics about whether SATS has another acquisition lined up, although the company has said it intends to raise its net gearing to 30 percent to improve its return on equity. Analysts speculate this could mean either further acquisitions or simply more dividend payouts to come.
Cost And Competition
Whatever the case, Tan is not resting on his laurels. With the rising costs of raw materials and employee wages, he needs to keep a lid on expenditure.
In FY2012, total expenditure, excluding TFK, rose 9 percent. Staff costs, the biggest expenditure, increased 5.7 percent, while the cost of raw materials rose 4.2 percent. Operating margins were about 10 percent, down from 12.4 percent in FY2011. The company says the cost increases were due to higher business volumes as well as inflation.
To cut costs, SATS has started to integrate its non-aviation food-catering operations. Tan hopes to combine Country Foods and SFI into one entity within the next few years, once a location for a centralized facility is found. Already, some operations have been streamlined and he expects more cost and staff reductions ahead.
"We're looking at lean management at the whole organisational level, and putting in place initiatives to improve processes," he says.
Tan also has to be on the lookout for new competition. To be sure, SATS has managed to maintain a strong presence at Changi even after the opening up of the ground-handling sector in 2004.
The first new licence in 20 years was awarded to Swissport, the global ground-handling giant, which eventually exited Changi in 2009 after tens of millions in losses. Aside from SATS and Changi International Airport Services (CIAS), which is majority-owned by Emirates Group's Dnata, the third ground handler is U.S.-based Aircraft Service International Group. But ASIG, which was awarded the licence last June, is said to be having difficulty bagging even its first airline customer.
Still, SATS can be expected to grow in tandem with Changi Airport's passenger traffic growth, although any capacity cuts by airlines could put its earnings at risk, say analysts.
"We forecast Changi Airport's passenger throughput to rise 7.8 percent in FY2013," writes UOB KayHian analysts K Ajith and Eugene Ng in a May 15 note. "For SATS, this should translate into similar passenger handling growth and unit services growth of 6.8%."
UOB has raised its FY2013 and FY2014 earnings forecasts by 3.8 percent and 0.5 percent respectively, to $193 million and $213 million respectively. The brokerage is maintaining its "hold" call on the stock, but raised its price target to $2.68, from $2.43, based on 14.7 times five-year mean earnings.
Credit Suisse analyst Chua Su Tye writes that SATS' operating margins should improve, given the better mix of businesses with the divestment of Daniels. Valuations remain undemanding at 15 times earnings and three-year-average 7 percent free cash-flow yield. Credit Suisse has an "outperform" call on SATS, with a higher price target of $2.90.
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