SIA ENGINEERING COMPANY LIMITED

SIA Engineering Company Limited (SIAEC) is a one stop aircraft maintenance, repair and overhaul (MRO) company in the Asia Pacific. SIAEC was founded in 1992, listed in 2000 and is a subsidiary of Singapore Airlines Limited (SIA). SIA has 77.55% direct equity ownership of SIAEC.

STOCK INFORMATION

TICKER SYMBOL: S59.SI
MARKET CAP: S$4.32 Billion (Updated 1 July 2015)
MARKET PRICE / SHARE: S$3.84 (Updated 1 July 2015)
INDUSTRY: Air Services

THE BUSINESS

SIAEC is split into the following 2 segments:

• Repair & Overhaul
• Line Maintenance

Repair & Overhaul (S$678 million | 61% of FY2015 Rev)

This segment broadly covers operations like airframe maintenance, component overhaul, engine repair overhaul services, and fleet maintenance programs. Basically, SIAEC offers a one-stop service for almost all of your airplane concerns.

Be it routine inspections, damage to your aircraft body, a refitting of your cabin interior (Hint: Guess who’s in charge of the conversion of cabin interiors for SIA’s new premium economy class), retrofitting of your in-flight entertainment systems or even if you don’t like the existing color of your aircraft and want to change it to tiger prints (this is purely just for example!), SIAEC is the place to go.

On top of that, one of SIA’s operational edge would undoubtedly be their capabilities in the area of engine overhaul. You might think that the above mentioned maintenance services were rather generic and might wonder what’s their moat. However when it comes to the aircraft engine (those magical things that keep you up in the air), it’s a whole different ball game. With how SIAEC was structured, this was right up its alley. Fun fact: new engines costs up to a third of a new jet.

Through SIAEC’s Joint Ventures (JV), not only do they have the capabilities to repair major aircraft engines, more importantly they have deeply entwined with the 2 of the top aircraft engine manufacturers in the world – Pratt and Whitney and Rolls-Royce. General Electric, Pratt and Whitney and Rolls-Royce dominate the airplane engine market. To place things in perspective, Rolls-Royce was mentioned has a market share of 50% of the widebody (Planes with 2 aisles – like the famous duo of Boeing 747 and Airbus A380) market in 2014.

The second contributor of this segment is the offering of fleet management services. SIAEC provides their customers with:

• Engineering/Technical support: Cabin layout, Assessment of fuel performance (fuel is a big part of an aircraft’s expense), monitoring of engine health (you definitely don’t what to wait till you are up in the air before realizing your engine needs repair)
• Documentation: Certificates, maintenance records (handy to show the authorities)
• Defect Rectification and prevention: Troubleshoot, monitor and evaluate
• Planning: Schedule of maintenance
• Inventory management: Component repair management
• Up-to-date status updates: Check your aircraft/engine progress anytime, anywhere

Line Maintenance (S$442 million | 39% of FY2015 Rev)

You know the people at airports that check and rectify planes before every single flight. Yup, that’s SIAEC. Other than Singapore Changi Airport, SIAEC also offers variations of such a service through JV in Hong Kong, Indonesia, Philippines, Australia, USA and Vietnam.

Geographical Breakdown

Close to 80% of SIAEC’s FY2015 Rev of S$1.1 billion came from East Asia.

KEY OPPORTUNITIES

1. Relatively simple-to-understand business and consistent demand (Relatively much more stable than the Biotech industry) business

In this day and age, people need to travel and airplanes are the best option (I don’t think most of us want to go back to hiding in the  hull of a container ship for over a month to cross the pacific ocean, well at least for the foreseeable future until teleportation takes hold. Most people that I know of like to feel safe when flying. And that is where SIAEC comes into the picture.

Simply put, SIAEC is an aircraft workshop. A car workshop services cars. SIAEC services jets and as a bonus, also offer a whole bundle of after-service monitoring packages to keep your jet in tip-top shape.

In the past 5 years from FY End Mar 31 2011 to 2015, SIAEC’s Rev fell within the range of between S$1.1 → $1.2 billion. In my books, that’s quite a low level of variability and given the conditions in the past 5 years, this generally points towards a business with a relatively inelastic level of demand. In the short run there might be temporary blips, but if things don’t go too south, demand should revert to a certain level.

2. Consistently Solid Margins & Clean Balance Sheet

SIAEC’s Gross Profit Margin (GPM) has also been like machine work, consistent at ~68% for the past 8 years (A rough rule of thumb when a business cycle is considered).

Over the past few years, net profit has also been impeccable with an average margin north of 20%! However, SIAEC seems to have a blip for FY End 2015 with a net profit margin of 16.4% and this will be highlighted in our discussion on key risks.

Don’t just take our word that SIAEC has a very strong balance sheet. Just take a look at their FY2015 numbers.

Total Assets = S$1.4 billion (Cash and Equivalents of S$0.46 billion)
Total Liabilities = S$0.3 billion
Total Shareholder’s Equity = S$1.35 billion

In my opinion, this was about as clean as a balance sheet could be. Cash and Equivalents alone could cover all of their liabilities!

3. Shareholder Friendly Actions

Although SIAEC does not have a fixed dividend policy, from their dividend records over the past few years, I won’t think that many of their shareholder would make too much of a fuss with regards to their dividend policy with quite SIAEC paying out quite a significant % of their accounting earnings as dividends to shareholders. There was even a special dividend of 5 cents / share paid out in FY2014. SIAEC’s TTM dividend yield stood at

Although the past is not indicative of the future, it is noteworthy to mention that SIAEC’s diluted shares outstanding for FY End 2015 was 1.12 billion per share. In 2010, the shares outstanding stood at 1.08 billion, a mere increase of 0.7% per year. And we tend to prefer companies that aren’t trigger happy in such industries.

KEY RISKS

1. Structure of Company Associates and JV

As mentioned earlier, there was a blip in their FY2015 earning. This went a long way towards highlighting one of the key risks of SIAEC. Due to their operating structure, SIAEC is dependent on both their Associates and JVs.

And purely due to an accounting treatment, this risk was highlighted from the divergence of their Net Income and Operating Cash Flow. There has always been a divergence between their Net Income (Broadly implied as how much you expect to receive) and Operating cash flow (How much cold hard cash comes in from your operations) and things were no different for FY2015 with S$185 million compared to S$96 million. But why is this so?

Fear not, this is not a financial sleight of hand of any sort. Why this takes place is because on the Income Statement, SIA’s share of their Associate and JV earnings are taken into consideration. However for their Cash Flow Statement, it only accounts for real cash that comes in and instead of operations, the contributions of Associates and JV fall under Investing Cash flow through dividends!

This meant that SIAEC’s cash flow is very much dependent on Dividend payments from their Associates and JV. And in a year that this source of income is reduced (What if Associates and JV might just lowered their dividend?), SIAEC would be hit hard. And that was what happened for FY2015.

2. If you are looking for a growth company, you might want to look elsewhere

This is where consistency is a double edged sword. From SIAEC’s historical performance, you would not be expecting significant growth and this was exemplified during the discussion of their historical Rev earlier.

3. Operational and Shareholder links to Parent

Even though the risk of their parent SIA or even their ultimate shareholder Temasek Holdings (Pte) Limited doing anything shareholder unfriendly is so miniscule, it is still worth to mention who has SIAEC’s back. And with the continuation of this SIA Engineering Company Signs $2.9 Billion Services Agreement with Singapore Airlines, I would say that this arrangement is working out well for both parties!

We would tend to pay more attention if the major shareholder has a history of shareholder unfriendly-ness (Especially in Asia). However, with both SIA and Temasek, we feel that SIAEC’s shareholders should be able to sleep soundly at night.

Top 3 Shareholders (As at 2 June 2015)

1. Singapore Airlines Limited: 77.55%
2. DBS Nominees Pte Ltd: 7.48%
3. Citibank Nominees Singapore Pte Ltd: 2.48%

Number of Shares: 1,121,921,984

 Financial Statements

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any companies mentioned.

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