Siaec_logoWarren Buffett is not a huge fan of the airline industry. That much we know. But SIA Engineering (SGX: S59) could be a different proposition, altogether.

SIA Engineering is a subsidiary of Singapore Airlines (SGX: C6L). It also counts Temasek as one of its major shareholders.

It is tangentially associated with the airline industry, but it doesn’t have the same financial characteristics of an airline company. In other words, it doesn’t have high operational gearing and it doesn’t have low margins. One other thing, it is also quite profitable.

SIA Engineering services aircraft. It maintains, repairs, and overhauls aircraft engine for around 80 different airlines. But apart from ensuring that the engines purr when they are supposed to, it also maintains airframes, modifies cabins and even manufactures aircraft cabin equipment.

Its expertise in aircraft maintenance is underlined by its high Net Income Margin. This can normally indicate a competitive advantage through stronger pricing power, which is one of Buffett’s selection criteria. Its margin of 23% is not only consistently higher than the market average but also higher than, say, regional rival Hong Kong Aircraft Engineering (HKSE: 44), which boasts a Net Income Margin of 15%.

Buffett also likes companies with low earnings volatility and SIA Engineering’s earnings have been as reliable as the day is long. Its net income over the last years has been clustered around $260m. Apart from low earnings volatility, Buffett also warms to companies with low stock price volatility. In the case of SIA Engineering, its share price volatility of 16% compares well with the market volatility of 18%.

Another item on Buffett’s checklist is efficiency. In the case of SIA Engineering, its Asset Turnover of 0.7 compares favourably with the average of 0.5 for the 30 companies that make up the Straits Times Index (SGX: ^STI). It suggests that the company is generating 70 cents of revenue for every dollar of asset employed in the business.

The company’s Return on Equity of 20%, which is another of Buffett’s gauges, is also higher than the blue-chip average of 9%. What’s more, SIA Engineering has not achieved this through excessive borrowings. Its Leverage Ratio of 1.2 is quite a bit lower than the market average.

All told, SIA Engineering looks good. However, it is not cheap.

With a market value of S$5.7b, it is valued at more than four times its book value, which could make Buffett think twice. But in its defence, SIA Engineering has grown its dividend from eight cents per share in 2005 to 22 cents per share last year. That could go some way to explain its impressive total return, which amounts to over 15% a year over the same period. That could also be why investors are prepared to pay as much as 20 times earnings for the company’s shares.

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