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A Deeper Look Into SIA Engineering’s 52% Share Price Decline

SIA Engineering Company Ltd (SGX: S59), or SIAEC, deals with aviation line maintenance and aircraft maintenance, repairs, and overhaul (MRO). SIAEC has more than 80 international carriers and aerospace equipment manufacturers as customers and provides line maintenance to more than 50 airlines passing through Singapore.

SIAEC has seen its share price fall from a high of S$5.00 on 1 June 2014 to around S$2.42 on 31 May 2019. This is a decline of around 52% that occurred over five years. I decided to take a closer look into whether this decline was justified — and whether SIAEC may actually present a compelling value proposition for investors.

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Airframe and line maintenance segment decline

I decided to take a peek at SIAEC’s segment report to tease out where the problem was and whether it was evident in the numbers. This is what I managed to compile:

Source: Author’s compilation from SIAEC’s Earnings Reports FY 2017-2019

Since the airframe and line maintenance segment took up the bulk of revenue, we’ll turn our attention there, rather than to engine and components. There’s only three years’ worth of data for comparison because of a change in disclosure for SIAEC in FY 2018. Prior to that, the segments were named “repair and overhaul” and “line maintenance.”

There seems to be a trend of margins declining, especially from FY 2018 to FY 2019, from 7.7% to 6.0%. In addition, there is also a year-on-year decline in revenue for this division, as shown below:

Source: Author’s compilation from SIAEC’s Earnings Reports FY 2017-2019

The double-whammy of declining year-on-year revenue and also poorer margins may help to explain why SIAEC’s group-level earnings have been declining. Recall that an earlier article highlighted two risks for SIAEC: that of a longer maintenance cycle for engines and equipment, as well as stiffer competition from neighbouring countries that are trying to grab a slice of the MRO pie in Asia. The decline in revenue would be symptomatic of the first risk, while the fall in margin seems to be a result of the second risk.

Dividends reduced from 2015 onwards

Aside from the revenue and margin declines, another metric I considered was the absolute dividend per share SIAEC paid out.

The decline in dividends occurred between the years FY 2014 and FY 2015 and has been continuing ever since (if we strip away the 5 Singapore cent special dividend paid out in FY 2017 due to the divestment, FY 2017’s full-year dividend would have been S$0.01 less than FY 2016). This also coincided with the start of the decline in SIAEC’s share price.

Not out of the clear just yet

It seems, based on SIAEC’s commentary from its FY 2019 results, that the group is not out of the clear yet. The group’s outlook statement said “the MRO operating environment remains challenging,” and that revenue will also be affected by the unforeseen grounding of customers’ aircraft. SIAEC has, however, embarked on a transformation journey that should see some productivity gains over the next three years.

The share-price decline over the last five years, therefore, seems justified in light of these findings. Investors should monitor the MRO industry and review SIAEC’s transformation efforts to see if these will bear fruit for the group. It seems SIAEC is definitely not out of the woods yet.

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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 Royston Yang does not own shares in any of the companies mentioned.