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SIA Engineering Company Limited’s Shares Have Declined More Than 20% in the Past Four Years: Can its Business Turn Around?

SIA Engineering Company Limited (SGX: S59), or SIAEC, provides a number of services, such as base and line maintenance of aircraft, repair of aircraft components, and inventory management of aircraft. The firm is 77.7% owned by Singapore Airlines Ltd (SGX: C6L) and both companies are part of the Straits Times Index (SGX: ^STI).

SIA Engineering’s shares have declined from around S$5 in May 2013 to S$3.75, as at the time of writing. This translates to a slump of more than 20%. Can its stock go back to its heyday?

To help answer that, let’s take a look at the latest Annual General Meeting (AGM) presentation slides released by the company recently.

Competition in the Maintenance, Repair and Overhaul (MRO) Industry

Source: SIA Engineering Company FY16/17 AGM Presentation Slides

The most probable reason for the share price fall is the poor performance of the business.

SIAEC’s net profit for the past five years has been on a decline, from S$270.1 million in its Financial Year Ended 31 March 2013 (FY12/13) to S$172 million, excluding divestment gains, in FY16/17. This translates to a decline of some 36%.

SIAEC has 25 joint ventures and subsidiaries in over nine countries but the share of profits of associated and joint venture companies has been coming down too – from S$159.2 million in FY12/13 to S$96.5 million in FY16/17.

In the latest fiscal first quarter earnings, the firm said that the operating environment for the MRO industry “remains challenging”.

Technological advancements in new aircraft mean longer check intervals and lesser work content. This could translate to lower base maintenance revenue for SIAEC, since the amount of work required for an aircraft’s lifespan is reduced. Furthermore, keen competition from Original Equipment Manufacturers (OEMs) who can provide MRO services has not helped SIAEC either.

Investing in Innovation and Technology

Source: SIA Engineering Company FY16/17 AGM Presentation Slides

Despite the challenges it is facing, SIAEC is looking at ways to innovate and transform its business.

In April this year, it announced that it had “signed a Memorandum of Understanding with Stratasys Ltd., a leading 3D printing and additive manufacturing solutions company, to offer design, engineering, certification support and parts production to our global network of airline customers”.

Due to regulatory reasons, it might take years for SIAEC to be able to print structural aircraft parts and fit them onto planes, but I feel investing in 3D printing is a step in the right direction. 3D printing should help to reduce costs for SIAEC.

On top of additive manufacturing, SIAEC is also considering digitalisation, robotics, and data analysis. These might not be accretive in the short-term, but it should help foster long-term growth.

Forming Strategic Partnerships

Source: SIA Engineering Company FY16/17 AGM Presentation Slides

Source: SIA Engineering Company FY16/17 AGM Presentation Slides

To strengthen its foothold in the MRO sector, SIAEC has been joining hands with a few companies to form strategic partnerships. One of the most recent deals was with GE Aviation (GE).

Last month, SIAEC and GE both agreed to set up a new engine overhaul joint venture (JV) in Singapore. The JV will provide a full suite of engine MRO services for the GE90 and GE9X engines. Once necessary approvals have been granted by the authorities, the JV will establish a state-of-the-art facility, with GE’s “Brilliant Factory” concepts that unite “advanced technologies and lean practices with digitisation and data analytics to enhance productivity”.

The Foolish Bottomline

The MRO landscape has not been too friendly to SIAEC, as seen from the recent weaknesses in net profits. However, it is not throwing in the towel just yet. As seen above, it is investing for the future by embracing new technology and forming strategic partnerships. Hopefully, the investments bear fruit so that SIAEC’s business can be back to where it was before the downturn.

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