Quick Screening Series:$SIA Engineering(S59.SI)



---
This column is written by @calvinwee 
-Calvin is a fundamental analyst at heart and an ardent disciple of value investing. He relishes the process of searching for undervalued stocks and enjoys collecting dividends from his stocks.

Company overview:
SIA Engineering Company Ltd (SIAE) specialises in providing aircraft maintenance, repair, and overhaul (MRO) services. SIAE is a subsidiary of Singapore Airlines Ltd (SGX: C6L), counts over 80 international airlines as its customers.

SIAE is split into the following 2 segments:
1. Repair & Overhaul
SIAE offers a one-stop service for virtually all types of airplane issues, ranging from airframe maintenance to component overhaul. SIAE’s primary edge lies in its Joint Ventures and its strategic partnership with Pratt and Whitney and Rolls-Royce and most recently in June, GE Aviation, the top aircraft engine manufacturers in the world. This bestow it with the capabilities to repair major aircraft engines.
2. Line Maintenance
Apart from its operations of checking each plane before the flight in Changi Airport, SIAE have business interests in Hong Kong, Indonesia, Philippines, Australia, USA and Vietnam through its JVs.

Key financial highlights



Data source: SIA Engineering Annual Report

➢ Revenue, at $1,104.1 million, was 0.8% lower than the preceding year.
➢ Revenue from line maintenance increased 11.5% to $513.0 million.
➢ Overall, net profit increased 88.2% to $332.4 million, boosted by divestment gains of $178.0 million.
➢ Excluding the divestment of Hong Kong Aero Engine Services Ltd, net profit declined 2.6% to $172.0 million.
➢ On the bright side, SIAE continues to maintain its strong balance sheet with S$601.7 million cash and equivalents and borrowings of S$25.9 million in FY17
➢ Also, SIAE increased its total dividend for FY17 to 18 cents per share, up from 14 cents in FY16.

Outlook
Upsides

1. Changi Airport Terminal 4
➢ With the completion of T4, which has a planned capacity of 16 million passenger
movements, boosting Changi Airport’s current capacity of from 66 to 82 million
passengers per annum.
➢ With more passengers flying in and out of Singapore, this will potentially translate to
more planes for SIAE to service, since SIAE dominates 90% of the line maintenance market at Changi Airport.

2. Growth prospects of air traffic in Singapore
➢ In a report published by IATA, it is predicted that by 2035, Singapore will handle about 117 million passengers - 87 per cent of the planned capacity, with the completion of T5

3. Strong balance sheet
➢ SIAE has a D/E ratio of 0.02 and a net cash position of more than S$400m of cash and cash equivalents on its balance sheet after accounting for final and special dividends
➢ SIAE is well positioned to capitalise on any attractive opportunities that will bolster long-term growth.

4. Collaboration with upstream and downstream partners
➢ collaboration with established partners such as Boeing (fleet management), Airbus (heavy maintenance), and GE aviation (engine overhaul),
➢ revenue drivers in the long run, with exclusive access to the global OEM markets
➢ New MOUs signed with downstream partners such as Moog and Stratasys
➢ SIE’s strategic tie-ups with OEMs and other related companies are a step in the right direction but will not see results in the short term.

Downsides

1. Airlines cost-cutting measures
➢ Airlines are attempting to cut operational costs amidst the cutthroat environment by using newer engines that require less maintenance,
➢ Places downward pressure on MRO rates, rate cuts is a potential scenario to protect market share
➢ Case in point, SIAE’s revenue for line maintenance grew to a high of S$267m in 2H17 but operating margin shrank to 15%, lower than the historical average of 23%.

2. Poor performance from majority of SIAE’s business segments
➢ Only its line maintenance segment is growing
➢ Insufficient to prevent a10% yo-y decline in core operating profits for FY17.

3. Heavy reliance on SIA for business
➢ Close to 70% of top line is driven by SIA.
➢ The growth and maintenance cycle of SIA's fleet therefore strongly impacts SIAE’s core businesses.
➢ As mentioned, SIAE already captures around 90% of the line maintenance market at Changi Airport, thus market share gains are improbable.

Analyst opinions.
Against the backdrop of the lukewarm economic climate and political developments, the MRO industry remain extremely challenging. With the possibility of weak MRO demand in the near future due to structural changes in the industry. The intense competition in the airline industry will continue to put pressure on the margin front.

However, despite the gloomy forecast, there remains a silver lining for SIAE in terms of growth opportunities. SIAE’s investment in strategic partnerships and advancing innovations provide it with a first-mover advantage. By positioning itself as an OEM partner early in the game, SIAE should benefit in the long term from the territorial exclusivity granted to it as OEM’s total care programmes have been gaining a lot traction with airlines especially in Asia-Pacific. These initiatives will strengthen the SIAE's core competencies and service offerings at its Singapore main base, and position it for long-term and sustainable growth.

Disclaimer
All research reports are of the analysts’ personal opinions and do not in any way reflect InvestingNote’s official opinion. InvestingNote does not issue a buy or sell recommendation on any security, and any research paper published by The Signal Blog is purely for informative purposes. This research is based on current public information, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual InvestingNote users. InvestingNote users should consider whether the information in this research is reliable, and suitable for their particular circumstances and, if appropriate, seek professional advice. The price and value of investments referred to in this research and the investment income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

Read more
4 likes

Recommended & Related Posts

Contrarianism Part 2: Lessons from Templeton. Vote for your stock!

If you like this column, please start voting which stocks you would like them to write on in their next article! This is your chance to interact with them and they will write on the most voted stock of your choice!

How to vote: Comment any of the 4 listed stocks of your choice mentioned in the article (M1, Comfort Delgro, SPH, SIA Engineering). The most number of likes/comments by Monday morning will be chosen. It’s that simple!

Voting starts now and ends on Monday (31st July) when market opens (9am)!

Disclaimer: this article simply provided analysis on stocks from the fundamental perspective, it does not represent any buy/sell recommendation from Investingnote. *All the dollar unit ($) in this article refer to SGD.

This column is written by @j_chou.
–Jay has an interest in global macro trends, financial markets and equity research and enjoys applying a combination of the three in his investments. His eventual investing goal is to manage a risk parity portfolio and achieve true financial freedom.

--
With S&P 500 and NASDAQ closing at record highs today and VIX Index at a 23-year low, the timing seems ripe to revisit the contrarian approach!

Besides Dremen, another famous investor whom we can learn the contrarian approach from is Sir John Templeton. Known for his acumen in global stock-picking, Templeton’s principles of purchasing at “maximum pessimism” pushed him towards stocks that had been entirely neglected. His story of profiting off the Great Depression is legendary: in 1939, he purchased $100 worth of every stock which was trading below $1 per share on the New York and American stock exchanges. This totaled about 104 different companies, a whopping 34 of which were bankrupt, and Templeton’s initial investment was $10,400. After four years, he managed to sell those shares for nearly four times the money he had initially invested. His genius proved to be timeless, as yet again in 1999 during the dot com bubble he famously predicted that 90% of the new Internet companies would be bankrupt within five years, and he very publicly shorted the U.S. tech sector.

Let’s look back on some of Templeton’s famous words of wisdom and see if we can gain any new insights into the current market!

“The four most dangerous words in investing are: ‘this time it’s different.'”

Against the calls of caution by some prominent hedge fund managers, there are many who have instead been up in droves to quash any bearish sentiments. Many bull investors view this run as different from the dot com bubble; they believe that this time round stock market appreciation is driven by fundamentals and earnings growth.

In fact, even prominent bears are increasingly turning bullish.

Robert Shiller, famed for creating the Shiller P/E and predicting the dot-com bubble and housing bubble, has frequently warned that the market looks “very expensive” but has recently claimed that several sectors in the market are relatively cheap, including the best performing tech stocks and “stocks could go up 50% from here”.

Three years ago, famous bear investor Jeremy Grantham of GMO was firmly in the camp that the extended post-crisis market rally was due for a correction. However, recently Grantham has decided that U.S. large caps deserve to trade at higher multiples than the past as they have far more earning power.

Even Warren Buffett, once famously averse to technology stocks, is now one of Apple’s (AAPL) biggest shareholders. He pointed out at Berkshire Hathaway’s recent annual meeting that big tech firms are different from traditional companies as they do not require much capital to grow.

Maybe this time it really is different?

“Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Templeton warns against being too confident of one’s own investing abilities, as “An investor who has all the answers doesn’t even understand the questions.”

The brilliant former Business Times columnist Teh Hooi Ling noted: “Humans are by nature optimistic. When two views are presented, the optimistic and pessimistic ones-we tend to think that the optimistic view will pan out. That is until we are proven so dead wrong that we lose hope entirely and regard any light at the end of the tunnel as an oncoming train. That’s the time we would dismiss any optimistic prognosis.”

It is indeed common sense that one should buy low and sell high. Yet due to human behavior it is hard to go against the herd mentality. As such, it is best to rely on technical indicators to provide a clear outlook of the market.

One such indicator as suggested by Teh Hooi Ling in her article “Spotting A Bubble From Some Distance Away” was to use the equity risk premium(ERP). By analyzing when to hold stocks or cash by setting a buy signal when ERP rises above 4%, and selling when ERP is below 2%, for a period of 15 years, she managed to generate compounded annual return of 10.5%, above STI return of 6.2% for the same period.

Hence, when ERP gets too low it may indicate a bubble forming, and it may be better to hold cash until ERP increases.

“Focus on value because most investors focus on outlooks and trends.”

As InvestingNote members often gripe, being contrarian is easier said than done. How are we to be greedy when others are fearful, when we are at the same time afraid of catching a falling knife? The answer, as surmised by Sir John Templeton, is to focus on intrinsic valuation. It is no coincidence notable contrarian investors are also strong believers of value investing: Graham, Buffet, Klarman, Dreman, Neff, Templeton etc. Instead of panic-searching for news or analyst opinions, assessing a stock based on fundamental analysis and healthy ratios into the long term is probably the safest and surest way to successful contrarian investing. After all, if due diligence was done your investments will be protected by margin of safety.

Contrarian opportunities in SGX?

Recently, there have been some SGX stocks that have seen a plunge in prices and generated negative sentiments in the InvestingNote community. Are these companies a contrarian opportunity or are the fall in prices justified?

Vote in the comments below and let me know which stock you would like me to analyse!

$M1(B2F.SI)

Post by @RetiredOldMan: https://www.investingnote.com/posts/143401

Post by @KallangRiverWoof: https://www.investingnote.com/posts/146351

Post by @Sporeshare: https://www.investingnote.com/posts/146442

$SIA Engineering(S59.SI)

Post by @CASHFLOW: https://www.investingnote.com/posts/145930

Post by @PhilipCapital: https://www.investingnote.com/posts/146289

$ComfortDelGro(C52.SI)

Post by @akwl88: https://www.investingnote.com/posts/145310

Post by @BrennenPak: https://www.investingnote.com/posts/144298

Post by @Jimes: https://www.investingnote.com/posts/145354

$SPH(T39.SI)

Post by @indigo: https://www.investingnote.com/posts/144840

Post by @mlow: https://www.investingnote.com/posts/141963

Post by @Turtle_Investor: https://www.investingnote.com/posts/141131

Please cast your vote on your favourite stock (pick 1 out of 4) in the comments below before the market opens on Monday at 9am!

Read more
About Contact Privacy Terms Widgets Store

There are more for you ...

View more and participate in our discussion now. It's FREE.

Creating an account means you’re okay with InvestingNote's Terms and Conditions