SIA Engineering Company Ltd (SGX: S59), or SIAEC, has probably seen better days. Its share price has tumbled from a high of around S$4.60 five years ago to just S$2.58 as the group faces structural changes and headwinds in the airline industry.
As a recap, SIAEC provides extensive aircraft maintenance, repair and overhaul (MRO) to more than 80 international airline carriers and aerospace equipment manufacturers worldwide. The group owns six hangars and 17 in-house workshops in Singapore and provides line maintenance services to more than 50 airlines passing through Singapore.
The airline industry has witnessed its fair share of structural changes over the last few years, as the proliferation of low-cost carriers (LCC) threatens to upend the business model for full-service airlines. While this may spell good news for MRO players such as SIAEC, as it implies that there are more aeroplanes to maintain and service, competition among MRO players has also intensified.
Investors may wonder if SIAEC remains a great business to own despite facing these numerous challenges and headwinds. Let’s take a look at three aspects to determine this.
Financials and margins
SIAEC’s revenue has remained fairly constant over the years, but operating profit has taken a noticeable tumble. From a high of S$104.4 million in FY 2016, operating profit has declined to just S$56.8 million. Operating profit margin has fallen from a high of 9.4% to just 5.6%, and clearly demonstrates the pressures that SIAEC is facing within its core business.
Looking at the net profit, it has fared somewhat better as net profit has held fairly steady at around S$170 million to S$180 million over the years, with just a slight decline to S$161 million in FY 2019. As an explanation, net profit is significantly higher than operating profit for SIAEC as the group enjoys a share of profits from the many associate companies and joint ventures that it has forged over the years.
Free cash flow
SIAEC’s free cash flow (FCF) track record is great, with the group generating consistent and stable FCF in the last five years. The amount of FCF does fluctuate significantly, though, but investors should note that this is essentially a very cash-generative business.
SIAEC also derives investment cash flows from dividends declared by its numerous associated companies and joint ventures.
The group’s dividend history is not impressive, as it can clearly be seen that core dividends (i.e. excluding special dividends) have been reduced over the years. From a total annual dividend of 14.5 Singapore cents in FY 2015, this has been reduced over time to just 11 Singapore cents in FY 2019.
The reduction in dividends tracks the decline in operating profits for the business as it faces pressure from competitors and a decline in engine checks due to the higher efficiency of new engines.
Monitor the business for signs of stabilisation
SIAEC is, therefore, not such a great business to own at the moment as operating profits are on the decline and dividends are being slashed. Though FCF is still positive and healthy, this does not erase the fact that the business continues to be under pressure.
Investors need to monitor the business and industry closely for signs of stabilisation, as this may represent the turning point for SIAEC to increase profits and declare higher dividends again.
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.