Christmas is coming…
In the spirit of gift-giving, what is the one Singapore-listed company that you may consider buying for your next generation as a valuable gift for them?
Let’s ponder on that question for a while.
The question makes one think of the super long run, doesn’t it?
If our investing time frame is measured in decades or even generations, we will be forced to think about the things that matter: the long-term prospects of a business; the leaders behind a company; and the value of a business.
As investors, we want to invest in companies that have products or services that will not become obsolete in the next few years – ideally, we want to buy companies with businesses that can survive the various economic cycles. We can even take advantage of falling stock prices during market corrections if we have a long-term view.
However, if our time frame is extremely short, say one month, we would be focused on stock price movements, and we could get emotional when the company’s share price tanks.
Warren Buffett, arguably one of the world’s best investors, has a quirky quote with regards to investing for the long term:
“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”
He went on to say in his 1988 shareholder letter (emphasis is mine):
“In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.”
Yes, Buffett has sold shares, but it is the mindset behind his quote that matters.
Now, back to the question on a Singapore stock that you can consider gifting to your next generation.
I asked the same question myself, and the stock that I chose is in-flight caterer and ground handler, SATS Ltd (SGX: S58).
I picked SATS based on three simple questions, which are inspired by Buffett himself. I ask these same questions when I look out for shares to add to my stock portfolio as well.
Those thought-provoking questions are:
1) Is the business simple to understand?
2) Does the company have a durable competitive advantage?
3) Will the business still be around for decades to come?
Let’s attempt to answer those questions below.
Does SATS Have A Simple Business?
SATS provides food solutions and gateway services solutions, largely to the aviation industry. For its financial year ended 31 March 2019 (FY18/19), of the S$1.83 billion in total revenue, 86% was from the aviation sector.
The food solutions segment provides in-flight catering, institutional catering, and so on. Meanwhile, the gateway services division offers ground and cargo handling, passenger and security services, and baggage handling services, among others. SATS is a dominant player at Singapore’s Changi Airport.
In my opinion, SATS is a simple business to understand.
Does SATS Have A Wide Moat?
SATS has a dominant market share providing in-flight catering and ground-handling services at Singapore’s Changi Airport. It also has a strong network of joint ventures and strategic alliances in many countries. Right now, SATS is present in 60 locations across 13 countries in the Asia Pacific and the Middle East.
This massive network and its presence in many key airports should help to keep SATS’ competitors at bay. I feel it would just be too difficult for a new competitor to take over SATS’ entrenched market position.
Another way to find out if a company has a durable competitive advantage is to look at its return on equity (ROE).
Generally speaking, a company that has a history of generating high ROE while employing little or no debt is very likely to have a strong competitive advantage. In my books, any ROE figure above 15% is great.
The following shows how the ROE figure has improved for SATS over the years (the firm had a debt-to-equity ratio ranging from just 0.06 to 0.07 times from FY14/15 to FY18/19):
SATS’ ROE has increased from 13.7% in FY14/15 to 15.1% in FY18/19 while employing very little debt. This is no easy task, and it shows the competency of the firm’s management team.
Will SATS Be Around For Decades To Come?
SATS is very likely to be around for many years from now as its services are essential in both the aviation and non-aviation world.
In terms of growth in Singapore, as long as our country remains relevant to tourists, SATS should continue doing well. To cater to the growing number of tourists here, Changi Airport is expected to open Terminal 5 around 2030, and the terminal will be larger than Terminals 1, 2 and 3 put together.
Also, more visitors are also visiting Singapore by sea. To cope with the rising demand, there are plans to expand Marina Bay Cruise Centre (MBCC). SATS owns 60% of MBCC’s terminal operator.
Then there’s worldwide demand for quality and sustainable food, and providing for that demand is what SATS does best.
To capture the industry tailwinds and to accelerate its growth, SATS will be investing S$1 billion in the next few years. It plans to invest in a digital integrated supply chain across the region to reduce production costs and food waste, and at the same time, improve food security, traceability, and sustainability. It is also looking to invest in a digital cargo platform to enhance connectivity and reducing mishandling costs.
All-in, I’m a firm believer that SATS will be around for many, many years to come, and that it’s worth considering gifting its shares to your loved ones this Christmas.
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the company mentioned.