Is SIA Engineering Company Ltd’s (SGX:S59) Dividend Yield Sustainable?

SIAEC2

 

 

 

 

 

 

 

 

 

SIA Engineering Company Ltd (SGX:S59) Group provides extensive maintenance, repair and overhaul (MRO) of aircraft to more than 80 international airlines worldwide. With a market capitalization of S$4.6 billion, the Group has 6 hangars and 22 in-house workshops in Singapore which provides complete MRO services in airframe, component, engine, aircraft conversions and modifications to major airlines from four continents.

 

SIAEC Group main revenue source is derived from both repair & overhaul and line maintenance business as shown in the table below:

 

Total Revenue (SGD millions) 2012 2013
Repair and Overhaul 725.3 743.6
Line Maintenance  421.4 434.6
Total 1146.7 1178.2

 

Including its associated companies and joint-ventures, the Group generates an operating cash flow + cash dividends received of approximately S$250 million per year between FY2006 and FY2014. With its relatively low capital spending requirements, SIAEC generates a free cash flow of S$196 million per year over the same period.

 

SIAEC last paid out S$0.25/share in dividends in FY2014 which implies a dividend pay-out ratio of 106% when it earned a dilutive-EPS of S$0.24/share. Historically, its dividend pay-out ratio has averaged around 75%.

 

 Fiscal Year End-Mar

2006 2007 2008 2009 2010 2011 2012 2013 2014

Dividends per share (SGD)

0.10

0.12 0.20 0.16 0.18 0.14 0.21 0.22 0.25

Earnings per share (SGD)

0.22 0.23 0.23 0.24 0.22 0.24 0.24 0.24

0.24

Dividend payout ratio

45.2%

53.3% 85.8% 66.4% 82.6% 59.6% 86.1% 90.5%

105.5%

 

Currently, the Group’s shares has a dividend yield of around 4.6%.

 

MRO Service Industry Outlook

There is a huge opportunity in the MRO services industry given the potential growth in air travel within Asia Pacific, driven by stronger domestic consumption. Moreover, the MRO services industry in Singapore is largely dominated by SIAEC and ST Aerospace, a subsidiary of ST Engineering (SGX:S63). Within the region, Sepang Aircraft Engineering (SAE) and Hong Kong Aircraft Engineering (HKSE:0044) are direct competitors. The high capital requirements of entering the industry, niche technological know-how of engines and a need to employ qualified talents raised the barrier to entry. However, with the airlines industry facing higher operating costs, airline companies might eventually opt for lower-cost MRO service providers, potentially intensifying competition.

 

Value in Action

SIAEC is directly owned by SIA and is highly dependent onthe airlines industry. The Group has not missed dividend payments since FY2006 and has paid an average 75% of its diluted earnings.

 

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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.

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