SATS just reported its first quarterly loss ever: What's next for the stock?

SATS Ltd reported its first-ever quarterly loss since its listing back in May 2000.

As a leading provider of food solutions, SATS provides airline catering and operates central food kitchens for food service chains and restaurants.

The other division, gateway services, comprises baggage handling, aviation security services and aircraft cleaning, among other tasks.

Due to the Covid-19 pandemic, the group had requested for a two-month extension for its FY2020 release, and did so in early July.

For the fourth quarter of FY 2020, revenue fell 8.1 per cent year on year to $433.1 million and the group incurred a loss of $6.3 million.

However, after stripping out an impairment loss on its associates, SATS’ core net profit stood at $5.6 million.

The weakness in its business has not gone unnoticed. For the year to date, SATS’ share price has plunged by 46 per cent to close at $2.78.

With the pandemic situation still unresolved, is this a good time for investors to revisit the stock?

Aviation industry still suffering

It has been almost six months since the pandemic broke out back in January, but the world has yet to effectively manage the spread of the coronavirus.

The worst of the pandemic saw Singapore’s flagship carrier, Singapore Airlines Limited, grounding 96 per cent of its fleet in late March.

Singapore Airlines bore the full brunt of the pandemic and had to announce a massive rights issue to shore up its balance sheet.

For SATS, it derived around 82.6 per cent of total revenue from the aviation industry for FY 2020.

Most of this revenue will vanish in the first quarter of the fiscal year 2021 (1Q 2021) as customers such as Singapore Airlines provide the bulk of SATS’ fleet.

Unfortunately, there isn’t any good news in sight at the moment.

Yesterday, Singapore Airlines announced that only 7 per cent of scheduled flights will operate for August, up marginally from the 6 per cent in July.

Meanwhile, there are fears of a second wave of global Covid-19 infections, with Sydney in Australia reporting 14 new cases and the US setting a record for new infections at over 69,000 last Friday.

Making the best of a bad situation

SATS has not been sitting still, though.

The group has redeployed resources to help support the set up of cruise ships to serve as temporary accommodation for recovered migrant workers.

Up-skilling of staff has been accelerated to support digital initiatives across the entire organisation.

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In a nutshell, management has been making the best of a bad situation, the likes of which no one could have anticipated even in modelling a worst-case scenario.

In an interview with SATS’ CEO Alex Hungate in late May by CNBC, he mentioned that the group may make a loss of between $50 million to $70 million in 1Q 2021.

Meanwhile, employees are being re-deployed to non-aviation catering as this segment has not been badly affected by the pandemic.

The group also drew down on credit facilities to bolster its liquidity position so that it can better weather this prolonged crisis.

Cash inflow from borrowings increased by $305 million during the quarter, and the group ended the fiscal year with around $415 million in gross debt, up from just $95.4 million a year ago.

A new air travel landscape

The problem is that even when air travel does eventually recover, investors may be staring at a permanently altered air travel landscape.

SATS mentioned that “there is no doubt that the way we fly will change”, highlighting the fact that air travel may never be the same again.

New digital solutions, food technology and safe packaging may have to be employed on future flights.

Airlines may also have to incur more costs in cleaning and sanitizing aeroplanes, ensuring safe distancing and performing more stringent temperature and health checks.

All these measures will take a heavy toll on all aviation and aviation-related businesses as expenses increase, while passenger volumes may not revert to pre-crisis levels anytime soon.

Get Smart: Uncertainty still reigns

In my view, SATS is in no danger of failing. The question is on how the business will have to evolve to fit the new operating landscape.

The group has bolstered its balance sheet and still has a key role to play in serving the aviation industry.

Its food trading and distribution business is expected to grow as SATS builds up its non-aviation food segment.

But for now, significant uncertainty still reigns as the pandemic situation remains fluid.

Investors should probably continue to monitor the company for signs of a more firm recovery before committing their capital.