A-Sonic Aerospace looks to grow logistics business post watch-list exit

A-SONIC Aerospace has the distinction of being the first company to exit the Singapore Exchange Watch-List in 2022, after the bi-annual review in June.

The logistics and aviation counter entered this list in 2017 after reporting 3 consecutive years of pre-tax losses and failing to meet a minimum trading price requirement of S$0.20. The company was later unable to exit the list because a new minimum market capitalisation requirement of S$40 million was introduced.

This Watch-List inclusion caused some issues when bidding for contracts, as it came up during the due diligence process for customers, so exiting it has been a relief for A-Sonic.

Yet, the more significant development for the company has probably been the boom in the logistics sector.

For the first half of 2022 it reported a 25.3 per cent increase in profit attributable to shareholders to US$4.1 million. Revenue was up 15.1 per cent to US$222.5 million.

All of that growth can be attributed to the logistics segment, which accounted for US$220.7 million in revenue for the period. Aviation brought in US$1.3 million.

The logistics segment’s profit was US$5.7 million, up 27.3 per cent. The aviation segment reported a small loss of US$253,000, an improvement from a loss of US$430,000 in the year-ago period.

Janet Tan, chief executive officer of A-Sonic, said the aviation loss was partly because the costs of the listed company are lumped into this segment.

According to the company’s responses to shareholder questions in April, ahead of its annual general meeting, the operating expenses of the listed holding company comprised 71 per cent of the total operating expenses of the aviation business unit.

Nevertheless, Tan acknowledged that the aviation business is challenging.

A-Sonic buys used engines and aircraft to retrofit and sell for a profit. The company had a deal for a retrofitted aircraft prior to the pandemic, but this was cancelled by the buyer when the pandemic struck. A-Sonic managed to sell off the aircraft early this year.

“Aviation is going to be more opportunistic. We’ll try not to hold too much inventory and match the buyer to the seller,” Tan told The Business Times.

The company still has some aircraft spares to sell, holding about US$902,000 worth of inventory as of Dec 31, 2021. She said A-Sonic is on the lookout for engines rather than aircraft, having sold over 10 engines per year prior to the pandemic.

Tan added that the global sentiment for the aviation sector is looking up, despite the low volumes by the aviation business, and margins are decent: “Logistics is going to be about volume, aviation is about profit.”

Growing logistics demand

A-Sonic’s logistics business covers most of the logistics supply chain – save last-mile deliveries. This includes sea and air freight, warehousing, transshipments, land transport and customs clearance.

The company has managed to be in the right place at the right time, acquiring enough air and ocean freight capacity, at acceptable prices, to support about 90 per cent of their customers’ demand.

“If you buy at rates through the roof, it’s very hard to sell,” Tan said.

As macroeconomic conditions shift, however, A-Sonic is looking at a weaker outlook for its logistics business.

Typically, the second half of the year sees more volume for logistics operators as businesses gear up for the Christmas season. But rising fuel prices, which freight operators have passed on to logistics operators such as A-Sonic, have forced A-Sonic to pass on some costs to its customers in turn.

A-Sonic is looking to keep costs down to maintain its spread, while working on other mitigating strategies.

“The volumes are coming down, so we sell more products and acquire more customers to make up for the difference,” said Tan.

Part of A-Sonic’s logistics business is customs clearance, and it takes a fee on every item it clears for customers.

This part of the business is a lucrative one. Customers appreciate a service provider with the right knowledge and system, as they can also save money if the right customs clearance is applied for.

Some geographies where A-Sonic operates also have regulations that make it more difficult for customers to change service providers, such as not being able to have more than 3 customs agents.

“Once you have the systems set up, you just have to match the codes. So, for a shipment, you might have to key in a new code, but match the rest, which reduces costs,” said Tan.

A-Sonic is looking to grow its logistics volume by selling more services to existing customers, such as air freight services to sea freight customers or warehousing to shipping customers. The company is also looking out for potential earnings accretive acquisition targets to grow the business inorganically, but has no target in mind just yet.

“Because of all the uncertainties, we aren’t trying to enter new countries but to grow the volume from where we are currently operating. Do what you do best and scale up,” said Tan.

Investor apathy

Despite its participation in a fast-growing sector, A-Sonic appears undervalued on several measures.

The counter closed at S$0.685 on Friday (Sep 2), up 42.7 per cent this year and its highest level since 2014.

It has outperformed the benchmark Straits Times Index, which is up 2.2 per cent. But the current price still gives A-Sonic a market capitalisation of just S$60.5 million, which is less than the company’s cash and cash equivalents of US$48.2 million (S$67.6 million) as of Jun 30. A-Sonic had no borrowings at the end of H1.

A-Sonic also trades at a price-to-earnings ratio of 5.4, and a price-to-book ratio of 0.8.