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SIA Engineering Company Ltd is at a Multi-Year Low: Would Warren Buffett Be Interested?

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SIA Engineering Company Ltd (SGX: S59), or SIAEC for short, provides aircraft engineering services such as airframe maintenance and overhaul, line maintenance, technical ground handling and fleet management.

Over the past five years, the firm’s share price has fallen more than 20% as opposed to the Straits Times Index’s (SGX: ^STI) rise of around 5% during the same period. SIAEC’s shares are currently trading at S$3.24 apiece; the last time the company’s shares changed hands at such a price was in 2009.

Would legendary investor Warren Buffett see value in SIAEC?

We can’t ask him directly – and even if we could, we highly doubt we would get any answer. However, we can still get some insights by turning to a six-point acquisition criteria for businesses formulated by Buffett himself.

1. Pre-tax earnings of at least US$75 million

For the full year ended 31 March 2017 (FY2016/17), SIAEC had pre-tax earnings of S$355.1 million, which translates to more than US$75 million.

Verdict: Pass

2. Demonstrated consistent earning power

Source: SIAEC FY2016/17 annual report

As can be seen from the chart above, SIAEC’s earnings have been anything but consistent.

In fact, profit attributable to shareholders (before divestment) has declined from around S$300 million in FY2012/13 to S$172 million in FY2016/17. As a note, in FY2016/17, SIAEC saw a one-off divestment gain due to its disposal of a 10% stake in Hong Kong Aero Engine Services Ltd.

Verdict: Fail

3. Good returns on equity (ROE) while employing little or no debt

Source: SIAEC FY2016/17 annual report

The ROE of 21.9% in FY2016/17 includes the divestment gains. Excluding this one-off item, SIAEC’s ROE would have been lower at 11.1%.

Therefore, the company’s ROE has been on a decline over the years, and the latest ROE is below the average of 15.7%.

Verdict: Fail (debt level was not looked into as the ROE already failed the litmus test)

4. Management in place

Png Kim Chiang, the director and chief executive officer of SIAEC, has 42 years of experience in the aviation industry after having joined the parent company, Singapore Airlines Ltd (SGX: C6L), in 1975.

Furthermore, there is a strong bench of executives behind Png who have many years of aviation experience. Their combined years of expertise should mean SIAEC is in good hands.

Verdict: Pass

5. Simple business

SIAEC is a relatively simple business to understand.

The company maintains an aircraft when it berths at an airport’s apron (the area where an aircraft is parked, unloaded or loaded, refuelled, or boarded) and at the hangars. Each aircraft needs to be checked thoroughly on the ground before it can fly again.

Verdict: Pass

6. An offering price

Although we cannot know what kind of offering price Buffett might receive if he were looking to buy SIAEC outright, we can compare the company’s valuation to the market’s to have a rough gauge of the attractiveness of the firm’s price.

At a price of S$3.24, the aircraft engineering outfit is trading at 21 times its FY2016/17 earnings (before divestment). This is much higher than the SPDR STI ETF’s (SGX: ES3) valuation of 11 times trailing earnings. The SPDR STI ETF is an exchange-traded fund that can be taken as a proxy for the Singapore market.

With the growth at SIAEC slowing, the valuation does not look attractive.

Verdict: Fail

Final score: 3/6. With the net profit and ROE on a decline, Buffett may not see any value in SIAEC. However, if the firm can demonstrate that it can turn around its business and grow its market capitalisation of S$3.6 billion in the years ahead, it would then better match Buffett’s acquisition criteria.

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