Over the past five plus years, aircraft maintenance, repair, and overhaul (MRO) company SIA Engineering Company Limited (SGX: S59) has been a steady source of dividends.
Foolish dividend investors would be excited to know that the annual dividends have been increasing as well. Starting from the financial year ended 31 March 2010 (FY2010), the dividend of S$0.16 per share had rose to S$0.25 per share by FY2014. Collectively, the company has paid out a sweet total of S$1.02 per share in dividends since FY2010.
The capital gains for SIA Engineering have been satisfying as well. From 31 March 2009 to its closing price of S$4.61 yesterday, it delivered share price gains of 147%. By comparison, the total returns of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), was only around 95% for the same duration.
The wind beneath its wings
While the returns from SIA Engineering have been uplifting, as Foolish investors, we should look under the hood to understand what the business drivers for this move in the share price has been.
The business segments in SIA Engineering can be grouped into two major categories: The Repair and Overhaul segment, and the Line Maintenance segment. The first segment can be broken down further into sub-segments, namely, the Airframe and Component Overhaul sub-segment. and the Fleet Management sub-segment.
To support the Aircraft and Component Overhaul sub-segment, SIA Engineering has 6 hangers in Singapore and 2 hangars in The Philippines. The business of the sub-segment involves regularly scheduled checks as well as major aircraft repairs or modifications. Scheduled checks are typically done in intervals between 500 to 25,000 flight hours. The Aircraft and Component Overhaul sub-segment has enjoyed a steady growth in sales for the past five years and is the largest revenue contributor at 49.2% of SIA Engineering’s total revenue for FY2014.
At the Fleet Management side, the company currently has 170 aircrafts from 12 airlines under its care. The Fleet Management business consists of the full range of engineering services, which include preventive maintenance of aircrafts and component support programs. The sub-segment is experiencing a sales decline for the past two years, and is currently the smallest revenue contributor at just 14% of SIA Engineering’s FY2014 revenue.
Finally, for the Line Maintenance segment, SIA Engineering operates in 34 airports in seven countries. The business in here covers basic routine and non-routine checks for airworthiness certification. This segment is dependent on the number of flights taken from the airports.
Beyond revenue, we would ideally like to see profit rise together with sales. For that, we look into the profitability of the business segments.
The tables are turned for the different segments when it comes to their contributions to the company’s total pre-tax profit.
The Line Maintenance’s profit (before tax) was more than double the Repair and Overhaul segment for FY2014. For the same year, profits (after tax) from SIA Engineering’s joint ventures provided 58% of its total bottom-line. Together, the Line Maintenance segment and the company’s various joint ventures provided more than 88% of total profit for FY2014.
Beyond this, Foolish investors would look for the accumulated profits to end up on the balance sheet. To do this, we look at the development of the company’s cash and debt.
SIA Engineering has carried negligible debt for the most part. As of the end of FY2014, its cash position has also grown to almost S$534 million. This represents a healthy balance sheet.
A peek ahead
FY2014 gives us some outlook of what to expect for SIA Engineering’s future.
For the Line Maintenance segment, the company has managed to secured 11 new airline contracts and renewed 12 contracts with existing customers. This may be good for the company’s future profit outlook.
For the Airframe and Component Overhaul sub-segment, the company has a third hangar in Philippines under construction and reported 15 new airline contracts for its Singapore base.
As of the end of FY2014, SIA Engineering has 25 joint ventures in 9 countries covering services such as line maintenance, engine repair and overhaul, and component repair and overhaul. A new joint venture partnership agreement with Boeing signed on 9 July 2014 is seen as a “game changer” for SIA Engineering. This Singapore-based equity partnership will see SIA Engineering provide fleet management services together with Boeing for the latter’s 737, 747, 777, and 787 series of planes.
As lifelong students of Foolish long-term investing, it pays to look under the hood to understand whether a rise in a company’s share price is supported by the quality of growth that we are looking for.
In the case of SIA Engineering, the steady growth at the Line Maintenance segment might be where we want to keep our watchful Foolish eye on. That’s because the segment appears to be where the stronger profit margins are coming from the company’s operational side (non-joint venture). The joint ventures provide a significant part of SIA Engineering’s profits as well. As such, we should also keep a look out for more partnerships as well as joint ventures as SIA Engineering tries to expand its worldwide network.
As of yesterday’s close, SIA Engineering was trading at a price-to-earnings ratio of 21 and carries a dividend yield of 4.4% (excluding the special dividend of S$0.05). Stay tuned in the weeks to come as I look into the geographical revenue spread of SIA Engineering.