8 Quick Things I Learned from SIA Engineering Company’s AGM 2014

SIA Engineering Company (SIAEC) was the first company I had on my watchlist when I first got interested in investing. It was one of two companies (the other one being ST Aerospace) in Singapore that deals with aircraft maintenance, repair and overhaul (MRO).

My link with SIAEC stretches back as far as seven years ago – when I was awarded their scholarship. If not for Lehman Brothers’ collapse in 2008 and the ensuing global recession, I might have ended up as an aircraft engineer and the safety of your aircraft’s systems would be in my hands. (It’s a huge responsibility to be an aircraft engineer!)

I knew it was a career that would give me a steady and comfortable paycheck. But unfortunately (or fortunately in hindsight), SIAEC froze their headcount when the economy tanked in 2008. Though I was on the priority queue for recruitment, I did not like the idea of waiting aimlessly for months not knowing when I would finally start my career with SIAEC (there was no stipulated date). So I decided to pursue my calling elsewhere.

Many years have passed since and I’m glad I made the decision to forgo my scholarship as I discovered my passion wasn’t in engineering after all, but in investing. As much as I took to engineering, I now find greater joy in picking winning stocks and building my wealth over the long term!

SIAEC is, in our definition, a great company. It fulfils the first three quadrants of The Investment Quadrant: it has a great, recession-proof business model; good, steady management with no obvious red flags; and strong financials. The only snag is… you guessed it – the stock is pretty expensive.

Anyway, I attended the AGM to study this great company further and see if anything interesting popped up. So here are…

8 Quick Things I Learned from SIAEC’s AGM 2014:

  1. SIAEC’s line maintenance business segment enjoys better margins over the rest due primarily to its near-monopoly of aircraft line maintenance services in Singapore. Most planes that land in Singapore need to engage SIAEC’s line maintenance service for mandatory safety checks. The company is also looking to expand this business segment into foreign airports as well.
  2. The maintenance, repair and overhaul (MRO) sector is a highly competitive market. Firstly, many aircraft MRO companies have been aggressively increasing their capacity and flooded the MRO market with excessive supply. Secondly, SIAEC’s clients are becoming more price sensitive amid challenging business conditions and a drive to lower their operating costs. And finally, a new original equipment manufacturer (OEM) has also ventured into the MRO sector driving overall competition up even further. With all these factors, SIAEC’s margins here could eventually get eroded.
  3. Partnering with a major OEM is SIAEC’s anchor strategy. The joint venture with Rolls-Royce has proven to be highly successful. The partnership was born when Rolls-Royce, who in the past only sold aero-engines without a maintenance contract, decided to start doing so and formed two separate ventures with SIAEC to repair and overhaul aero-engines. The joint ventures contributed close to 40% of SIAEC’s net profit in 2014.
  4. In a recent announcement, SIAEC formed a new joint venture with Boeing to provide an integrated suite of fleet management services to airlines in the Asia-Pacific and beyond. Contracts have already been confirmed for an SIA fleet of 27 Boeing 777-300 planes and a Scoot fleet of 20 Boeing 787 planes under this new venture. Management mentioned it would be difficult to pinpoint the number of additional planes they will secure for now. The joint venture may not be accretive at the start and might take a few years to bear fruit. However, the strategic joint venture would enhance SIAEC’s competitive advantage and strengthen its technological know-how (transferred from Boeing). SIAEC’s fleet management segment has suffered two consecutive years of declining sales and profit, if the joint venture with Boeing takes off, this division may get a boost.
  5. According to SIAEC’s chairman, Stephen Lee, Boeing has changed their business model from merely selling planes to also providing comprehensive value-added services like maintenance support. With its enviable track record and expertise, SIAEC synergizes well with Boeing’s new strategy. Once the joint venture commences end 2014, Boeing and SIAEC would sell aircraft (Boeing’s strength) that comes with a 10 to 15-year maintenance contract (SIAEC’s strength).
  6. SIAEC believes that joint ventures with major OEMs should not be exclusive. For instance, SIAEC would still want to work with GE Aviation (Rolls-Royce’s competitor) should business opportunities, in other scopes, arise. This principle also applies to Boeing and their possible joint ventures with other aircraft MRO companies.
  7. SIAEC has a healthy cash position of $534 million as of 31 March 2014. Notwithstanding the size of its cash hoard, the management reiterated that SIAEC’s dividend payout is on the high side (~90%) and the cash would come in handy for operational needs and investment in future business opportunities such as the paid-up capital needed for their joint venture with Boeing.
  8. As of 31 March 2014, SIAEC listed a bank loan of only $8.2 million on the balance sheet. Due to accounting treatment of business joint ventures and associates, there’s actually an estimated $100 million worth of loans not reflected on SIAEC’s balance sheet. As an investor, it is important to always take into account of such debt in your analysis and when deriving the intrinsic value of a company.

(*Following the news on what’s developing in SIAEC ? Read the updates on SIA Engineering’s AGM 2015)

Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Rusmin is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur and is the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple's iBooks. Rusmin was actually a former SIAEC scholar who gave up his scholarship and a cushy career to follow his itch of learning how to be a better investor and ultimately lead a life of financial independence. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.

9 Comments

  1. Easy Life

    August 13, 2014 at 6:56 am

    Hi Rusmin, you mentioned that the price is too expensive. How will you determine your entry price?

    • Rusmin Ang

      August 13, 2014 at 2:55 pm

      Hi Easy Life,

      Back in 2010, I estimated SIAEC could conservatively generate 20 cents a share in free cash flow. Unfortunately, from a low of $1.54 in Mar 2009, the stock price had already rebounded to above $4 by then.

      At a P/FCF of 20, it was definitely not a bargain for a slow-growing company like SIAEC. I was late to the party and I didn’t want to overpay for the stock. In hindsight, it looks like a good move now.

  2. Daniel

    August 14, 2014 at 2:32 pm

    Hi, how do you determine whether you can buy this company or not?

    • Rusmin Ang

      August 16, 2014 at 10:38 am

      Hi Daniel,

      I determine whether I buy a stock or not based on my analysis using the Investment Quadrant.

      If ALL four quadrants of Business, Management, Financials and Valuation are met, it’s usually an easy call to make.

      • Daniel

        August 30, 2014 at 1:13 pm

        Are these 4 quadrants met now?

  3. Shi Kang Chong

    August 14, 2014 at 2:40 pm

    Hi Rusmin

    Given Siaec’s fairly high roe, relatively stable dividends and low growth rate, what is the best model to obtain it’s intrinsic value?

    Does ST aerospace, Siaec’s main competitor, concern itself mainly with commercial airliners or more so with the defense industry?

    Thanks so much
    Shi Kang Chong

    • Rusmin Ang

      August 16, 2014 at 10:45 am

      Hi Shi Kang Chong,

      Thanks for your question!

      Valuation involves multiple perspectives. The best model for me may not necessarily be the best model for others. It all boils down to your investment objectives and risk profile.

      So if you are an investor who is seeking dividends, dividend yield would be an important factor in your valuation. But if you seeking capital gains and you believe that Boeing’s partnership could boost SIAEC’s earnings moving forward, then other valuation methods like P/E, PEG, DCF, etc., would be more useful.

      ST Aerospace serves both commercial and defence across a wide range of industries – aerospace, marine, land, etc. You could check out on their latest annual report for the full list :)

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