This Blue Chip Stock Has Fallen By A Quarter Over the Past Year – Is It A Bargain?

The last 12 months hasn’t been an easy time for Singapore’s stock market as can be seen from the 11% decline that the Straits Times Index (SGX: ^STI), Singapore’s market barometer, has suffered since 21 August 2014.

But for some of the blue chips within the index, it has been an even more painful year. Aircraft maintenance, repair, and overhaul (MRO) services provider SIA Engineering Company Ltd (SGX: S59) is one of those unfortunate blue chips.

Over the year through 21 August 2015, its shares have lost 25% of their value. Given this big double digit drop, can the company be considered a bargain now?

A quick glance at the company’s valuation figures would suggest that bargain hunters may want to proceed with caution. At its current price of S$3.41, SIA Engineering’s valued at 22.4 times its trailing earnings. That’s nearly double the price-to-earnings (PE) ratio of 12 that’s carried by the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the fundamentals of the Straits Times Index – at the moment.

Meanwhile, SIA Engineering’s PE ratio has also been marching higher over the past three years as you can see in the chart below:

SIA Engineering PE ratio from 21 August 2012 to 21 August 2015

Source: S&P Capital IQ

Climbing valuations can be reasonable for companies with improving business fundamentals, but as you can see in the next chart below, SIA Engineering’s profits have been trending down steadily over its past 13 fiscal quarters.

SIA Engineering's quarterly net income

Source: S&P Capital IQ

The near-term picture for SIA Engineering also looks cloudy. In its latest earnings for the fiscal quarter ended 30 June 2015, it commented:

“Overall, market conditions for the MRO industry remain challenging. Rising business costs and competition from increasing MRO capacity in the region will continue to exert pressure on margins.”

High valuations and deteriorating business fundamentals can be a very harmful combination for one’s investment capital. Investors who are interested in SIA Engineering would have to be confident about the firm’s ability to boost its profits materially higher over the longer term.

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.