SIA Engineering Company Limited’s Earnings: After A More Than 20% Profit Decline, What’s Next?

Yesterday, SIA Engineering Company Limited (SGX: S59), a subsidiary of Singapore Airlines Ltd (SGX: C6L), posted its financial results for its fiscal third quarter. The reporting period was from 1 October 2014 to 31 December 2014.

The company’s bread-and-butter lies in providing maintenance, repair, and overhaul services for aircraft; it has three business segments, namely, Airframe & Component Overhaul, Fleet Management, and Line Maintenance. You can find out more about the various business segments in here.

Currently, SIA Engineering serves more than 80 international airlines around the world.

With these as a backdrop, let’s dig into SIA Engineering’s latest quarterly earnings.

For the quarter, revenue declined by 6.5% year-on-year to S$265.3 million. The poor showing was on the back of a fall in revenue from the airframe and component overhaul business due to lesser heavy checks. However, this decrease was offset slightly by higher fleet management and line maintenance revenue.

Moving down SIA Engineering’s income statement, share of profits from associated and joint venture companies did not fare well either. Contributions declined by 33.2% year-on-year to S$25.3 million.

The decrease came mainly from lesser engine shop visits due to “retirement of older engines, as well as engine improvement modifications and longer engine “on-wing” life of certain aircraft models.” The company predicts that engine shop visits will continue to decline going forward.

Lower revenue and profits from associates and joint ventures resulted in SIA Engineering’s quarterly net profit to slump 23.5% year-on-year to S$46.3 million. The company’s net profit margin declined from 21.3% a year ago to 17.5% in the latest quarter.

On the cost front, the firm commented:

“With intense competition and increasing business costs, the pressure on margins will remain. We will continue with our efforts to manage costs that have yielded improvements in productivity and operating efficiencies.”

SIA Engineering’s cash flow situation also took a step backwards. For the quarter, operating cash flow came in at S$24.6 million, a 44% decline compared to a year ago.

After all that gloomy talk, let’s turn to something brighter: The aircraft engineering outfit had ended the quarter with a robust balance sheet. As at 31 December 2014, its cash hoard and total borrowings stood at S$365 million and S$30 million respectively.

The strong balance sheet will help the company to meet its challenges and provide the ammunition for the firm to continue to pursue various opportunities and strategic initiatives.”

That said, investors should still watch how the balance sheet evolves over time as SIA Engineering actually had a much stronger balance sheet just nine months ago; as at 31 March 2014, the firm’s cash hoard and total borrowings were at S$536 million and S$22 million, respectively.

And speaking of strategic initiatives, last year, SIA Engineering inked a ”game-changing” joint venture with aircraft manufacturer, The Boeing Company. The joint venture will provide airline fleet management and maintenance services in the region for airlines that use Boeing’s planes.

If this joint venture manages to be a success, it’d be a nice positive for SIA Engineering. . The Competition Commission of Singapore should still be reviewing the proposed move to ensure it is not anti-competitive. Public consultation on the creation of the joint venture closed on 31 December 2014.

Learn more about SIA Engineering Company and many other listed companies through a FREE subscription to Take Stock Singapore. Sign up here to The Motley Fool’s weekly investing newsletter that will teach you how to GROW your wealth in the years ahead.

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 contributor Sudhan P doesn’t own shares in any companies mentioned.