Published May 15, 2009

COMMENTARY

Good for SIA - but what about SATS?

It is no longer 'mission critical' but is capable of growing beyond SIA

By VEN SREENIVASAN

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IN May 2004, SIA chief executive Chew Choon Seng told his staff that the company's board had reviewed the role of 81 per cent- owned subsidiary Singapore Airport Terminal Services (SATS) in the SIA group and decided that it was 'in the best interests of the group to maintain SIA's ownership of SATS, at this point in time'.

But Mr Chew did not rule out changes down the road, as SIA would continuously review the performance of its business units amid changing business conditions.

Fast forward five years, and SIA drops a bombshell, saying it was proposing a dividend in specie of the airline's entire 81 per cent shareholding in SATS.

'This will unlock shareholder value and enable SIA to concentrate on airline and aircraft maintenance, repair and overhaul businesses,' it said.

In short, SIA Engineering Company (SIAEC) will remain with the airline, while SATS will be let go. This is despite the fact that SATS has been a steady contributor to SIA's bottom line (the company posted net earnings of $147 million for the year ended March 31, 2009).

Its business has also been much less cyclical than SIA's, and as such it has helped smooth the volatility in SIA's earnings. And SATS, like sister company SIAEC, has traditionally enjoyed a higher return on equity of around 14-15 per cent, compared to the parent's 10 per cent, in the past.

Interestingly, the divestment comes about 18 months after Clement Woon Hin Yong, former president of the geosystems division at Leica Geosystems in Switzerland, took over as CEO and moved to diversify the company's businesses, boost its key competencies and, most critically, reduce its dependence on the cyclical aviation sector.

He was instrumental in engineering SATS' $509 million takeover of Singapore Food Industries (SFI), which will boost the share of its food business to more than 50 per cent.

It is easy - on the face of it - to conclude that this is a good deal for SIA, but bad for SATS.

Besides focusing on its core business and saving itself a huge cash dividend payout, SIA is now free to shop around for the best ground services deal, without being obliged to its subsidiary (though two companies have just inked a new five-year contract).

But what about the 'reciprocity' which SATS enjoys, whereby it gets the business of airlines whose ground services subsidiaries service SIA at their base airports?

It is too early to say.

But one thing is certain: SATS has been preparing for this day for the last 18 months. In Singapore, it is likely to remain the dominant ground services player for the foreseeable future.

Its food business reduces its dependence on the cycle-prone aviation sector.

In short, SATS will be able to independently pursue opportunities, without turning to its parent for approval.

But for SATS shareholders, perhaps the biggest gain will be the huge boost in liquidity of its shares, thus opening the door to global funds whose mandates do not allow them to invest in a company whose free float is less than 20 per cent; the $1.34 billion in specie distribution will see this free float rise to around 50 per cent.

Yes, SIA may have decided that SATS is not 'mission critical'. But the latter has the wherewithal and capability to grow beyond SIA - and, perhaps, even beyond aviation.