SIA Engineering Company Limited’s Latest Earnings: Challenging Times Ahead

SIA Engineering Company Limited  (SGX: S59) released its fiscal first-quarter earnings yesterday evening for the fiscal year ending 31 March 2016 (FY2016).

As a brief introduction for some context later, the company’s involved with the maintenance, repair, and overhaul (MRO) of aircraft. With that, let’s dig into the company’s latest figures.

Financial and operational highlights

In the first-quarter of FY2016, SIA Engineering saw a 5.7% year over year decline in its revenue to S$294.1 million. This happened mainly due to a drop in the company’s airframe component and overhaul business.

Interestingly, SIA Engineering’s operating profit for the quarter actually inched up by 1.0% from a year ago to S$20.9 million; the company had managed to lower both its staff and subcontracting costs during the reporting quarter, which improved its profit margin.

But, a 42% year over year plunge in SIA Engineering’s share of profits from joint venture companies to S$9.5 million had led the aero-engineer’s profit to decline by 22.8% from a year ago to S$41.3 million. It’s worth noting that SIA Engineering typically gets around half its pre-tax profit from its share of profits of associated companies and joint ventures.

There was a S$5.8 million one-off gain in the first-quarter of FY2015, but even after adjusting for that, SIA Engineering’s profit for the reporting quarter had still traced a 13.4% year over year drop.

SIA Engineering’s cash flow picture also had plenty of room for improvement.

For the reporting quarter, the aero-engineer brought in S$29.9 million in operating cash flow (including dividends from associates and joint ventures) and racked up S$8.5 million in capital expenditures. This thus gives rise to S$21.4 million in free cash flow (operating cash flow minus capital expenditures). These represent a big step backward from a year ago when the selfsame figures were S$70.5 million, S$19 million, and S$51.5 million respectively.

Thankfully, SIA Engineering had ended the reporting quarter with a balance sheet that’s still in the pink of health. With more than S$454 million in net cash (S$488.1 million in cash and S$33.7 million in debt), the company seems to have enough buffer to withstand any slowdown in its business.

A future outlook

According to SIA Engineering’s management, the MRO market continues to be challenging. In addition to a weak business environment, SIA Engineering would also have to deal with rising costs and competition; all these “will continue to exert pressure on margins.”

That said, SIA Engineering will keep its chin up and continue to improve its cost structure and competitiveness in all of its business segments. Furthermore, the company’s working on strengthening its ability to handle new generation aircraft.

Foolish Summary

The company’s taking proactive steps to grow its business, but it remains to be seen if they’re enough to overcome the gravitational pull of a weaker MRO market.

Based on its closing price of S$3.88 yesterday,  SIA Engineering’s valued at25 times its trailing earnings and 3.3 times its tangible book value. Its shares also have a dividend yield of 3.7% thanks to its annual dividend of S$0.145 per share in FY2015.

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