Can This Beaten-Down Blue Chip Become A Winning Share Again?

SIA Engineering Company Limited (SGX: S59) has been a beaten-down blue chip lately. Since the start of November, the aero-engineering outfit has seen its shares decline by 13.0% from S$4.76 to S$4.14 currently. This is in stark contrast to the rest of SIA Engineering’s blue chip brethren as the Straits Times Index (SGX: ^STI) is actually up by 2.47% in the same period.

With the company’s large price decline, is it a good time for investors to go bargain hunting?

A bargain that isn’t

To answer that question, we can turn to the firm’s current valuation:

SIA Engineering PE ratio

Source: S&P Capital IQ

At the moment, SIA Engineering is valued at some 21 times its trailing earnings. And as you can see in the chart above, that’s close to the highest valuation the company has reached over the past 10-plus years since the start of 2004. In fact, its current PE ratio is almost one-third higher than its long-term average PE of 16.

The company’s valuation also compares unfavourably with that of the market average; the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the Straits Times Index, carries a PE ratio of just below 14 currently. So, if we’re looking at just the hard figures alone, SIA Engineering’s shares still can’t be considered a real bargain despite suffering a significant drop in price over the past month.

But that said, it should also be pointed out that looking at valuations without consideration of the company’s future can’t give us the full picture. A share that looks expensive now can still turn out to be a bargain (if its business grows substantially), just as a cheap-looking share can still become a train wreck (if its business deteriorates).

Flying into the storm

With SIA Engineering though, it’s really a mixed bag for investors. The company is involved with the provision of maintenance, repair, and overhaul (MRO) services for the aircrafts of “more than 80 international airlines worldwide.” SIA Engineering has three business segments, namely, Airframe and Component Overhaul, Fleet Management, and Line Maintenance. You can check out a detailed description of what exactly SIA Engineering does in my colleague Chin Hui Leong’s article here.

The Airline Monitor has compiled data which shows how revenue passenger miles (RPM) – a key metric in the industry which shows the number of passengers carried multiplied by distance flown in miles – has grown at an annual compounded growth rate of between 5% and 6% since 1970. There are also forecasts for the RPM to grow from around 4,000 billion in 2014 to nearly 5,000 billion by 2018.

Closer to home, Singapore’s Second Minister for Trade and Industry, S. Iswaran, had also mentioned earlier this year that the size of aircraft fleets in the Asia Pacific region is expected to triple by 2020.

If these forecasts do come to pass, it can be a strong tailwind for SIA Engineering given that they all point toward more MRO-related work to be done for airlines.

But at the same time, there are signs that aircraft manufacturers themselves are muscling into the MRO space. For instance, the chairman of the Association of European Airlines, Temel Kotil, recently commented that “In the long term, the MRO market will be dominated by the OEM [original equipment manufacturers] monopolies.”

On that note, SIA Engineering has taken steps to maintain its relevance in the MRO market by launching a joint venture with aircraft manufacturer The Boeing Company back in July this year (the partnership is still subject to regulatory approvals as of 5 November 2014). The joint venture would be providing fleet management and maintenance services in the Asia-Pacific region. It might be great news for investors if SIA Engineering can secure more of such similar deals in the future as it can be a sign that the company’s expertise and knowledge is very valuable, even for the OEMs.

A Fool’s take

SIA Engineering’s latest earnings results, for the second quarter of the financial year ending 31 March 2015 (FY2015), was a tough one. The company saw its revenue decrease by 3% year-on-year to S$285.2 million while net profit got slashed by 40.7% to S$42.1 million. The near-term outlook for the firm also looks dim given the following comments:

“The Group’s performance continues to be affected by the decline in engine shop visits and heavy checks. Pressure on margins has not abated with rising business costs and intense competition. We are stepping up efforts to improve productivity to stay competitive in this overall challenging environment.”

Although SIA Engineering might enjoy some long-term tailwinds with the growth of its industry, investors would still need to watch the threats of growing competition and rising business costs.

Investors would need to weigh the risks and rewards with SIA Engineering in order to come up with an intelligent investing decision.

For more (free!) investing analyses and important updates about the share market, check out the Motley Fool's weekly investing newsletter Take Stock Singapore. This free newsletter can teach you how to grow your wealth in the years ahead, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.