Sats shows path to diversification for travel-related companies

SATS may still be best known as an inflight caterer and ground-handler, but it is well on its way to developing a brand new image as its efforts to expand its non-travel-related businesses bear fruit. The segment is now nearly neck and neck with the travel-related segment in terms of contributions to Sats's revenue pie.

The mainboard-listed company had last week released some business updates for Q1 FY2022.

Revenue from non-travel-related business was up 22.6 per cent at S$127.6 million, the company said, making up 46.3 per cent of its top line for the first quarter ended June.

Granted, the large contribution of this business segment probably has much to do with the dearth of travel-related business for Sats.

Global air traffic is still very much restricted, even though some countries have begun to open their borders to tourists.

In FY2021, the non-travel-related business segment had contributed an even larger 48.7 per cent of total topline.

But Sats shareholders should also celebrate the growth their company has managed to achieve in this segment, which is a relatively competitive one.

For FY2021, the non-travel-related business recorded growth of 38 per cent year on year.

Sats's non-travel-business is largely made up of food solutions. These are commercial catering, institutional catering, and sourcing and distribution. The latter two are the main revenue streams, contributing collectively 99 per cent of non-travel-related food solutions revenue.

Security services rendered to non-travel industries make up a very small portion of Sats's non-travel-related business.

Chief executive Alex Hungate said in the company's recent earnings call that Sats could reach a 50-50 balance between travel and non-travel-related revenue in the medium term.

"We're not sitting around waiting for aviation to recover. We're driving growth in the non-travel-related business in the meantime, and continuing to get good traction," he said.

Sats has demonstrated its focus with several investments.

It recently acquired a majority stake in a frozen food producer in Thailand that will be able to churn out 90,000 ready-to-eat meals per day for exports.

It is also establishing a central kitchen in India that could produce up to 170,000 ready-to-eat meals per day when operational in 2022.

The diversification into non-travel-related food has been underway for some time, and it only looks particularly prescient now that Covid-19 has decimated the travel industry. When Sats first embarked on this journey, the company would not have guessed the extent of its usefulness.

But Sats also offers a valuable lesson for companies on how to go about diversification in a steady yet meaningful manner.

Sats had elected to diversify more aggressively into food solutions because this business had significant overlap with its existing operations.

It was already a supplier of airline meals, so it knew something about how to produce food in large quantities. It also understood what types of meals could be prepared in advance for reheating later, and it had an efficient logistics operation to source ingredients for its meals and then distribute them.

The company has parlayed all that know-how into its catering operations, and is now also using it to select acquisitions that fit with its existing operations and align with its DNA.

Sats is not quite a pandemic winner. It is currently profitable, but that has more to do with the support it has received from the government to keep its staff in employment. The continued growth of its business does, however, give an indication of the capabilities of its management team in getting through a difficult period.

READ MORE: Growing non-aviation revenue streams will be key for Sats in near to mid-term