June 10, 2021

Making a Beeline For Thailand

SATS has made a small but likely strategic investment into a food manufacturer. While Food City has been operating in the red for the past three years, SATS’ announcement hints at a ramp-up in production as well as expansion into aviation food services, which could potentially reverse losses. We believe that SATS, with its business links to AirAsia, could garner a share of the airline catering market which is presently dominated by Thai Airways and Bangkok Air Catering, and also expand its product offering in the Thai retail scene. Maintain HOLD. Target; S$4.09.

WHAT’S NEW

Acquiring an 85% stake in Food City from publicly-listed Bangkok Ranch for S$21m. Food City Company Limited (Food City) produces frozen and ready-to-eat food in Thailand and supplies to wholesalers and quick service restaurants. Bangkok Ranch is the largest integrated duck meat producer and distributor in Thailand. The acquisition translates to 1.12x book value as at Apr 20. Post acquisition, the facility would be configured to focus on producing 90,000 ready-to-eat meals per day. SATS has stated that it “will benefit from Food City’s scale and location in the Thai food ecosystem to supply to its growing customer base across the region, from aviation to food service to retail”.

Salient terms of the sales and purchase agreement (SPA). Bangkok Ranch is responsible for settling all outstanding intergroup trade payables and receivables and is also responsible for the provision of transitional services to be provided by Bangkok Ranch. We believe this relates to the provision of food raw materials. SATS will have the option to purchase the remaining 15% of Food City on mutually agreed terms and conditions.

Food City has been in the red for the past three years but SATS could provide operating efficiency and add scale. SATS’ ambient and advanced frozen food technology has the ability to extend product shelf life and could complement Food City’s retail distribution network including fast casual restaurants and supermarkets. SATS could also market its own products, such as Farm Pride and halal-certified Amir. In addition, SATS could also extend its reach by providing meals to airlines, especially to AirAsia Group, with which it has a ground handing business relationship in Malaysia.

STOCK IMPACT

Small but strategic investment in Thailand, which has a population that is more than 10x that of Singapore. While Food City has been in the red, much of its product offerings were focused on duck meat. SATS is likely to expand Food City’s product offerings and had guided a daily production capacity of 90,000 ready-to-eat meals. Taking into account Food City’s past revenue, its capacity to produce meals is likely to be relatively small, and SATS has affirmed the same. Thus, SATS’ guidance of 90,000 steady state production could easily imply at least a fourfold increase in capacity and revenue. However, we are unsure about the timing of the planned production increase and the extent of new investment required.

Inflationary pressure from rising raw material costs is a key concern. Global food prices surged by 40% yoy in May 21 and was the largest jump in a decade, according to data from the United Nations Food and Agriculture Organisation. Inflationary cost pressures were already evident in SATS’ results for the Mar 21 quarter, when raw material costs as a proportion of food solutions revenue in 4QFY21 amounted to 49.5% vs 37.1% a year ago and 47.6% in the preceding quarter. This clearly indicates limited ability to pass on cost increases to customers.

EARNINGS REVISION/RISK

• There is no change to our earnings estimate as we have not incorporated Food City’s financials. Chances are that until SATS ramps up production, Food City is likely to remain in the red for FY22.

VALUATION/RECOMMENDATION

Maintain HOLD with a target price of S$4.09. We have valued SATS on an EV/Invested Capital basis, with a projected ROIC of 10.4%, growth rate of 2.3% and WACC of 6.7%. At our fair value, SATS would be trading at 21.3x FY24’s earnings.

SHARE PRICE CATALYST

• Opening up of borders

HOLD by UOB Kay Hian Research. Share price closed at $4.16.