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SATS the dividend growth stock for the next 10 years?

December 14, 2013 by Kyith 10 Comments

Some one tells me SATS is a rather good dividend growth stock.

If we invest in it now, how well will dividend grow?

I am not sure. There are many factors that come into play. But its been managed by roughly the same group of folks. That should count for something.

History may be able to tell us how good of a dividend growth stock SATS is.

Lets take a look.

How dividends grow

Dividends grow when free cash flow grow. A lot of folks look at earnings but end of the day free cash flow pays out the dividends not an accounting number.

The cash flow growth of a businesses largely can take the form of three ways

  • Organic EBITDA growth. Expand market share. Use resources to move to new market. In the case of SATS this will be to bid for food catering and airport services in other countries. Largely if not, it is due to industry growth. Due to some research on a complementary USA company, seems the industry usually grows at 5% per annum
  • Leverage. You sensibly leverage up to take opportunities and then pay down the debt.
  • Acquisitions. You become like a private equity firm and acquire earnings. For good management, you may improve on the acquisition to improve ROIC. For bad management, you just destroy the overall ROIC

Some notable acquisitions

The difference between SATS and its sister SIA Engineering (talk about a bit here) is that SIA engineering tends to form joint venture with key partners to establish a win-win situation.

SATS acquisitions tend to be more in the news

  • Sep 2013: Purchase of Singapore Cruise Centre for 100 mil at 12% ROA
  • Dec 2010: Acquire 50% stake in TFK corp for 122 mil at 9 times EV/EBITDA
  • Apr 2009: Acquire SFI for 500 mil at 7.4 times EV/EBITDA

On paper the acquisitions doesn’t look overly expensive and they should be accretive. Management would always sell you that they can improve the efficiency and margins upon acquisitions.

If management is good we should see the EBITDA margins improve and contributing more cash flow throughout the years, especially TFK and SFI.

In time, these should be important cash flow generators for the long term. We should see evidence of that

12 Year Data

Apologies for the 2002 data. I am probably too lazy to correct the formula there.

Revenue Growth

Revenue shows good growth for this 12 years.  From 895 mil it grew to 1.8 bil.

In all it’s a 103% growth or a compounded growth of 6%.

That is rather close to the 5% I mentioned previously.

If no big change for the future 20 years from the past 60 years, we should see a similar revenue growth rate.

EBIT and Free Cash Flow Growth

Since dividends are paid out of earnings and cash flow, as a dividend growth stock, these 2 metrics should be going up 12 years.

EBIT starts off at 216 mil and ended up in 2013 at 200 mil.

Free Cash flow starts off at 166 mil and ended up in 2013 at 234 mil.

Wait, isn’t earnings suppose to grow?

Well at least the free cash flow is growing. Perhaps its showing that it’s a more beautiful lower capital business than anticipated.

The compounded free cash flow growth was 2.9%

On the whole, for most companies, their net income and cash flow should grow much more than their revenue. This doesn’t seem to be the case for SATS.

This is despite accretive acquisitions in 2009 and 2010.

They give me the feeling the acquisition filled a void of higher competition or industry weakness.

Dividends Payout

In total for the 12 years, SATS paid out roughly 1713 mil in dividends.

Compare that to EBIT and FCF of  2280 mil and 2305 mil respectively, it does show that dividends are paid out of cash flow

The interesting thing is the payout ratio starting from 2002:

  • 20%
  • 26.8%
  • 31%
  • 206%
  • 40%
  • 45%
  • 67.8%
  • 100%
  • 63%
  • 70%
  • 102%
  • 144%
  • This half year 124%

The payouts have been increasing from the point where there are excess cash to a full payout of earnings.

It would seem the growth here, since there are not much earnings growth is the payout ratio instead.

It looks as if the management are trying damn hard to maintained a 5% yield at prevailing prices.

ROIC and the quality of the company

Much can be told from a little metric called ROIC and COIC.

The job of the manager is to manage capital effectively. If they manage it well, earnings (ROIC) and free cash flow (COIC) well, and leverage and pay of leverage, buy back shares wisely, these 2 metrics should change favorably

  • A consistently high ROIC likely indicates either little need of capital (in some industry) or certain moat that prevents competition
  • A rising ROIC indicates management creating value
  • A falling ROIC either means moat narrowing or management killing it or both

ROIC from 2002 to 2013:

  • 17.4%
  • 21%
  • 15%
  • 14.5%
  • 15.3%
  • 13.6%
  • 12.7%
  • 10%
  • 12.9%
  • 13.55%
  • 13.27%
  • 15.5%

The level of ROIC indicates a very average profile. It is certainly not the kind of 20-30% ROIC you expect from a business with a good moat.

Its interesting that in an economic boom from 2002 to 2009 the ROIC have been falling indicating perhaps tougher competition.

Management at least did well from 2009 to 2013 to correct it.

Perhaps its also due to the timely acquisitions which like SPH served more to prop up cash flow than build on existing strength.

Could share price climb?

The quality of capital deployment as shown by ROIC and COIC have indicated that if the management build on recent capital allocation improvement, the market is likely to reward it with higher share prices.

Indications from ROIC in the first half 2014 seem to indicate that capital management will be within this range.

For share price to climb, ask the question whether management can continue  to do the good work to improve and optimize new acquisitions.

For low ROIC companies, a 1% improvement in ROIC creates greater earnings growth than a 1% improvement in revenue growth.

Terminal 4 and 5 in 12 to 15 years time

A lot of the hype surrounding SATS are the business opportunity to handle Terminal 4 and 5’s airport services. With Terminal 5 as big as Changi, the sky is the limit.

If we use an operating cash flow of 270 mil for 2013, 70 mil perhaps comes from TFK and SFI, we could possibly look at an addition of 260 mil in cash flow 15 years from now.

That in itself may be a 4.7% CAGR.

What could temper with this figure? If they are unable to drive away the competition, this figure could look much lower.

Valuation in the past

Earnings yield at prevailing prices of 1st Jun every year:

  • 11.4%
  • 11.6%
  • 7.6%
  • 8.18%
  • 9.63%
  • 5.5%
  • 7.7%
  • 7.29%
  • 6.5%
  • 7%
  • 6.29%
  • 5.4%

For the level of quality if you buy it before 2006 at 8-11% earnings yield. This might be a really good deal with the level of quality you are getting.

Even if it  doesn’t grow, it’s a high enough  compensation versus the competition in assets taking into consideration quality and risk.

At 5.4% it’s a Price Earnings of 18.45 times.

Now Buffett tells us that you would rather pay for a quality business at a fair price than a lousy business at a good price.

If you say SATS is quality, what is a fair price?

We usually consider Price Earnings Growth or PEG of below 1.2 times  to be attractive.

In order for SATS at $3.30 to be considered attractive, at 18 times PE, it should at least grow by 18% per annum for the next 10 years.

If not 10 years you got to wait longer for the growth.

How crazy is 18% growth? consider earnings didn’t even grow for the past 12 years, you tell me.

Your dividend grew due to increase in payout.

Can they turn to acquisitions?

SATS HAVE been turning to acquisitions. And they probably didn’t overpay much.

A 100 mil investment probably will generate 10 mil in cash flow.

10 mil is like a 3.7% growth in EBITDA.

But acquisitions do not come often. You also don’t want SATS to anyhow acquire and over pay.

The moment ROI is below the cost of  capital, its not accretive.

Here is a test of management quality. If they are quality, they should accelerate it.

Acquisitions  usually are the least ROIC enhancing since they are usually a little more than the cost of capital.

Expanding to manage new services

Probably a higher value would be what they have done with Terminal 4 and 5, to find more of these deals  to manage with little capital investments.

What’s the likely future yield

If you have a time machine and you travel 10 years into the future, what will your yield be?

A rough equation would be as follows:

Future yield = Dividend + Share buyback from FCF + Left Over FCF x (ROIC/Cost of Capital) + Organic growth

Dividend and Share buy back gives you 5%.

There isn’t money left over but they can of course leverage. Acquisitions don’t come by often. This probably adds 2% to your yield.

Organic growth depending on whether competition is as brutal could fluctuate between 0% to 7%. Lets take the middle of 3.5%

Your yield probably will be 5 + 2 +3.5 = 10.5%

Lots of assumptions there, but from how my brain worked this out, you probably have an idea how some figures could vary.

Summary

I will leave whether this is a buy or sell to you. I am more in the business of prospecting.

18% growth is more of the kind of growth rate for a top management company like Dairy Farm, Disney and McDonalds.

A rather challenging hurdle considering  they have not even grow in the past 10 years figures wise.

Would Terminal 4 and 5 15 years from now matter so much? Remember that needs capital investments as well.

They do say that good business for a long period tend to remain as such, poor business will also likely remain as such.

We can see a lot from how ROIC performed in the past and as a future indicator if management is doing well there.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Filed Under: Dividend Investing Tagged With: sats

SATS purchase of Singapore Cruise Centre

September 28, 2013 by Kyith Leave a Comment

Well I thought this was a major purchase when you see the share price jump 3-4%. The announcement on yesterday was that SATS Airport services and SATS-Creuers will acquire Singapore Cruise Centre from Temasek.

Announcement here

SATS will effectively own 96.8% of it.

Singapore Cruise Centre have a license to operate for another 14 years. And perhaps it is likely that the license  will be extended (not sure if there is a licensing fee to it)

On a revenue of 45 mil and a profit before tax of 16.7 mil the margin comes up to 37%.  After a 17% tax rate, the margin becomes 30%.

At a purchase consideration of 101 mil the ROA comes to 12.8% which is very good.

13 mil looks like it will give a healthy boost to profit after tax for the Gateway services division, which is likely where it will go under.

Overall this will give a boost of 6% to profits.

But the bulk of the growth will have to come from tourism growth.

And since you need a license to operate the terminal, this is effectively a monopoly and margins should be protected.

The question is who stands to benefit more, Temasek or SATS. Why the hell is Temasek selling now. Probably a reallocation or the son making noise to ma ma to give him some toy to play with.

SATS have a PE of 17 times or 5.8% yield. That is an unlevered yield, which looks much better than SIAEC (brief look here) at 5.3%.

A look at the 5 year FCF seem to indicate that either management have too much cash and wants to distribute them or a risky way of allocating capital.

FCF is less than dividend paid out if you add up the 5 years (which should smooth out any fluctuations in  working capital)

On a Avg FCF/ Market Cap basis, the FCF yield is 4.4%, unlevered.

This deal more or less should boost FCF yield to 4.8%.

Good enough for you? Perhaps you may want to look deeper into it.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Filed Under: Stock Market Commentary Tagged With: sats

SATS–Dividends

January 1, 2013 by Kyith 4 Comments

Many have been interested in SATS on my Dividend Stock Tracker since it yields 9%. I decide to look at it again and see if that is sustainable.

So is it sustainable? It looks like I make a mistake factoring in special dividends. To manage the expectations, it is better to exclude the special dividends if we conservative look at sustainability.

the dividend yield fell to 3.8% if we take out special dividends.

Here is a break down of the dividends versus the earnings and free cash flow per share.

You can see that the Nov dividends are increasing gradually and not falling back. The Aug gets augmented with special div. Taking it out, a safe estimation is 11 cents.

But an alarming thing is that seeing the free cash flow trend to be drastically falling as the years go buy.

I thought they are making more acquisitions? Are we neglecting higher future cash flows from these acquisitions?

Usually the dividends paid out is less than EPS.

Filed Under: Dividend Investing Tagged With: sats

Technical Analysis of SMRT and SATS: Should you buy and sell

February 5, 2011 by Kyith 4 Comments

This isn’t so much of an analysis I feel. it is very clear cut. 2 transportation counters that wasn’t doing very well.

Fundamentals and Economic Moats

SMRT provides the rail transportation that majority of Singaporeans rides on while SATS focus on servicing the regional airports and food catering.

They are very defensive in that they deal with perishable services that has to be undertaken to maintain subsistence.

Decision to buy and sell

SATS (Click to enlarge)

SMRT (Click to enlarge)

  1. Should you have been vested in these counters from the lows at the start of this rally, your decision might be to ride out the horse throwing you off this bull market. Whatever profits made might go back to zero but you will be able to collect more.
  2. On the other hand, nothing beats earning your dividends early. Watching your capital shrink to zero and then go negative after 2 years is not a good idea as well.

The right decision I feel is probably:

  1. basing on the moving averages, take half or one third of the investment and profits off the table when it moves below the 200 day moving average.
  2. should the trend turns back up above the 200 day moving average, you get a re-entry point. Not much opportunity loss there and the move could be just as ferocious.
  3. have a x% drawdown from each current value of your portfolio. if it goes below this x%, offload the losers and those that would not do so well.
  4. in every investment horizon there are bulls and bears and they move in cycles. long term investing is a bet on sustainability of the companies you invest in as well as a punt on the macro-economic conditions being splendid going forward
  5. preserving psychological capital is sometimes as important as preserving your cash holdings.

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Filed Under: Dividend Investing, Singapore Stocks Tagged With: high dividend stocks, long term investment, long term market analysis, passive income, passive income dividend, sats, smrt, stock analysis

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About Investment Moats

Kyith Ng is the founder of Investment Moats, which mentors you on wealth management towards Financial Independence

Investment Moats shows how you can build wealth through stock market investing, dividend income investing through a value based approach. And then to distribute wealth.

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