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.
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.
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.
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.
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.
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