SIA Engineering

SIA Engineering -

These are my thoughts on SIA Engineering Company.

SIA Engineering Company (SIAEC), together with its 25 joint ventures and subsidiaries across 8 countries, form the SIAEC Group. The SIAEC Group provides extensive maintenance, repair and overhaul (MRO) of aircraft to more than 80 international airlines worldwide. At Singapore Changi Airport, SIAEC also provides line maintenance services to more than 50 airlines passing through Singapore. quote : jeremyowtaip.

I looked at the most recent statement by the chairman of the group in the 2016/17 annual report as well as the 9M 2017/18 financial report and noticed that there were recurring comments about their MRO services facing challenges and competition due to the newer aircrafts with advanced technology require less frequent maintenance. But the group is doing it’s best to innovate and upgrade the technology of their services to better fit the requests of their customers. Also, they continue to form strategic joint ventures and partnerships with other players to improve their overall competitiveness.

With this backdrop, we shall look into how the various financial metrics have performed over the past 7 years. The 7-year period taken is from April 1 2010 to March 31 2017 as the financial year for SIAEC ends in March every year.

The revenues have grown at a compounded annual growth rate (CAGR) of 1.34% over the past 7 years. The operating profits have decreased over the past 7 years. The profits attributable to shareholders of company have also decreased over the past 7 years (excluding any irregular non-recurring divestment gains on disposal of investments in subsidiaries, joint ventures and partnerships). The operating profit margins have decreased from 11% to 6.5% over the past 7 years. The profit attributable to shareholders margins have decreased from 23.5% to 17.3% over the past 7 years. The diluted earnings per share have also decreased from 21.8 cents to 17 cents (excluding divestment gains from disposal of investments in joint ventures and partnerships) over the past 7 years. It seems that the profitability of SIAEC has dropped over the past 7 years. Indeed, it is currently experiencing challenges and competition in the MRO services space resulting in the drop in profitability.

Total Revenue - is the sum of cash inflows, increase in operating accounts such as receivables and occasionally, unrealized gains generated in the course of Company's Business activities.

Let’s look at their balance sheet financial strength in terms of various metrics. I will compare the figures 7 years ago in March 2010 against that of most recent FY ended in Mar 2017.

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as risk, gearing or leverage.

Borrowing money for business all along to me is a double edge sword. If use well you grow fast and prosper. Some industries are highly capital intensive so borrowing lots of money is the only way to be in business or for expansion.

Debt to equity ratio = 0.00005 (2010) vs 0.017 (2017)

Current ratio = 3.08 (2010) vs 3.51 (2017) . It measures the company's ability to cover current debts with current assets.It it calculated by dividing total current assets by total current liabilities.

Quick ratio = 1.77 (2010) vs 2.15 (2017) . It measures the company's ability to cover current debts with liquid current assets. It is calculated by dividing the sum of the cash, short term investments, and account receivable by total current liabilities.

The balance sheet of SIAEC is very strong with high levels of working capital maintained throughout the past 7 years with very minimal or almost no debts carried on it’s balance sheet.

Let’s look at their cashflows trend over the past 7 years. Operating cashflows have grown at a CAGR of 2.62% over the past 7 years. Free cashflows have grown at a CAGR of 6.67% over the past 7 years. It seems that even though the operating cashflows have only grown at a low compounded growth rate, the company is able to grow the free cashflows at a much higher compounded growth rate. This could be due to lower capital expenditure requirements over the past 7 years that have resulted in more free cashflows generated.

Could that be also suggestive that the company has not been able to invest more cash into more potential areas of growth over the past 7 years resulting in the capital expenditures which have not grown even while operating cashflows have grown at a low rate? This also is shown in the dividend payout ratio which have maintained at high payout ratios of 70% and above for most of the past 7 years. It seems the company is not having much retained earnings to further grow it’s businesses but is seen to be giving out most of it’s earnings to shareholders in the form of dividends.

Let’s look at the management efficiency in their returns on assets, equity and invested capital over the past 7 years. The various returns show a declining trend over the past 7 years with the latest returns on assets, equity and invested capital being around 9.1%, 11.4% and 11.1% respectively. Thus, we see that management efficiency has declined over the past 7 years.

ROA - is a measure of company profitability relative to total assets. It is calculated by dividing Tax Effective EBIT ( earning before interest and tax) by average total assets over a twelve months period.

ROE - is a measure of company profitability relative to total equity. It is calculated by dividing Tax Effective EBIT ( earning before interest and tax) by average total equity over a twelve months period.

Now, let’s look at the fair valuation for SIAEC. For the worst case scenario if the operating environment continues to be challenging and competitive and SIAEC is not able to overcome the challenging operating environment, I am assuming a CAGR of only 2% in their diluted earnings per share for next 7 years. Using my method of estimation, their fair share price works out to be around $2.25. However, on a best case scenario should they be able to overcome their challenging operating environment, assuming a CAGR of 4% on their diluted EPS for next 7 years, their fair share price works out to be around $2.97. The share price of SIAEC is currently $3.18 which is slightly overvalued even if we factor in the best case scenario of fair share price at around $2.97.

These assumptions I think are fair as SIAEC has been experiencing falling profitability and returns over the past 7 years. Even if they can reverse this trend, their growth rates going forward may not be significantly high anymore. This could be also due to them being a large matured company and thus their growth rates going forward may continue to be non-impressive. Investors looking at SIAEC will be more rewarded with good dividend yields supported by it’s recurring strong free cashflows rather than capital growth in the share price. This is because SIAEC is no longer a high growth company as it used to a decade and more ago based on it’s past decade performance it has put out which shows that it has been slowing down it’s growth it seems.

SIAEC has been doing quite frequent share buybacks in recent years to stem the fall in it's share prices. However, the only long term solution to reverse the trend of it's gradually falling share prices is to improve it's profitability and returns. If not, no amount of share buybacks will be able to stem the trend of their gradually retreating share prices as share buybacks are only a temporary measure which cannot work forever as it is an artificial means to dress up falling profitability and returns. The fundamentals of a business will still eventually exert the heaviest weight to determine the long term performance in the share prices. Short term dressing up of share prices and performance metrics may make a company still look good for a while but it is not going to last for the long term if business fundamentals are not strong.

From TA point of view, it is still on a long term downtrend mode.
No sign of reversal yet.
It might re-test the recent low of $3.14. Breaking down of this level would not be so rosy and may see further selling down pressure.
As mentioned above, the company has been actively buying back share, therefore, price may likely fluctuate between $3.10 to $3.25..

Not a call to buy or sell.
Please do your own due diligence!


SIA Engineering Company Limited, together with its subsidiaries, operates as an aircraft maintenance, repair, and overhaul (MRO) company in East Asia, West Asia, Europe, South West Pacific, Americas, and Africa. The company operates through Repair and Overhaul, and Line Maintenance segments. The Repair and Overhaul segment provides airframe maintenance, component overhaul, and engine repair and overhaul services, as well as fleet management programs. Its services include scheduled routine maintenance and overhaul, specialized and non-routine maintenance, and modification and refurbishment programs, as well as fleet and inventory technical management services, including engineering and MRO solutions. The Line Maintenance segment offers aircraft certification and technical ground handling services, such as push-back and towing, and aircraft ground support equipment and rectification work services. The company also provides passenger aircraft to freighter conversion, cabin modification, training academy, and aircraft painting services. In addition, it is involved in repairing and overhauling hydro-mechanical aircraft equipment for Boeing and Airbus aircraft. The company was incorporated in 1982 and is based in Singapore. SIA Engineering Company Limited is a subsidiary of Singapore Airlines Limited.