Price of SIA Engineering have come down a fair bit this week. We take a look at it. (SIA ENGG is tracked in the Dividend Stock tracker)
Markets go through euphoric moments and downright pessimism but SIA Engineering have shown a respectable set of quarterly results. It is certainly strange that on days when yield stocks were beaten down, it managed to stay up well, only for it to sell down well.
We always like SIA Engineering, and at a lofty price of $5 there are little justification to buy it. Its certainly a good business but does not present us with a good margin of safety.
Would $4.60 be a good price? Technically we have a strong support zone near $4.45. If that doesn’t hold, we go back to 2011 territory.
I think many would welcome that scenario.
Summary of fundamental data
No of outstanding shares: 1110 mil
Market Cap: SGD 5120 mil
Debt: SGD 0 mil
Cash: SGD 522 mil
Enterprise Value: SGD 4598 mil
Earnings 2013: SGD 274 mil
Free Cash Flow 2013: SGD 255 mil
Dividend: 22 cents or SGD 244 mil
Dividend Yield: 4.77%
Free Cash Flow Yield: 4.98%
Earnings Yield: 5.3%
PE: 18 times
EV/FCF: 18 times
8 Year Financial Data
What you are getting in a box
We like SIA Engineering for a few reasons business wise, as a maintenance and repair arm of leading regional airline SIA, SIA Engineering enjoys a sustain business that is unlikely to be challenged by competitors.
SIA have a substantial stake in SIA Engineering.
On top of that, SIA is known around the world as a premium air travel brand, whose operation standards are higher than the norm. SIA Engineering have developed a reputation for quality service.
Being associated with a premium airlines is useless and likely will be found out if you are no results to show for it.
Through its joint ventures with major component providers, they have developed expertise in carrying out better service, improve the turn around time.
It is also an industry where you are likely not going to be competing on price alone since, safety and operations matter much more to the airlines than just cost.
Not all is a bed of roses. Rivals have developed their own MRO businesses and are edging in. You cannot say you are the only good providers around.
Not just that, sometimes ago, the aircraft manufacturers also thought it will be great to develop a recurring income in maintenance. Imagine for the same component repair, SIA Engineering’s quote will be 15% higher than that quoted by the aircraft manufacturers who would the customer choose.
Thankfully one customer is SIA, who would stand on the side of the company with the vested interest.
The key to circumvent and alleviate this is probably through the Joint Ventures that SIA Engineering have been developing with major component providers so that both sides stands to gain from this recurring business.
Contracts are typically long and whether its firm fixed price or cost based, performance and inflationary component would have built in.
Air travel looks to be here to stay. Singapore government indicates that they would want to develop addition of a terminal 5 which is larger than 2 and 3 combined, this means that more airlines will need servicing.
There will be competition, but that is a industry growth, one which we believe SIA Engineering will be able to take advantage of.
In summary it has become a business that is recurring, long duration and predictable, with little unknown shocks that can be expected.
I think it won’t be wrong to say that if you take up a yearly position in SIA Engineering and selling it when it becomes overvalued, you stand to make much more than if you were to hold it as a yield stock.
Even at a lofty price of $5.00, the yield stands at 4.4%. That’s not much different from current yield of 4.77%.
At a lower price of $4.20, you would get 5%. And if your required return is 6%, you better hope it gets low to $3.66.
$3.66 is entirely possible considered we got that at the tail end of 2011 in a bull market. Incidentally that is probably where I feel is a good compensation for a stock like SIA Engineering.
PE and EV/FCF
At 18 times PE, SIA Engineering fits the profile of a company, reflecting its predictable earnings capability over a long duration. That share price matches the black box that I described previously.
In the case of another business, that would look awfully expensive. Expensive because its hard to find a business that is as predictable and strong a business model.
If you have found something as good and a lower PE, its time to switch!
Incidentally the Dairy Farms and Raffles Medical, models which would classify as such trades at higher PE than this. Had they be lower than this, we will be diving into them.
As a comparison, Hong Kong Aircraft Engineering (44:HKG) trades at 23 times PE.
The cash hold of SIA Engineering looks big but really isn’t that large consider is less than 2 years of free cash flow.
Therefore EV/FCF looks about the same as the PE.
SIA Engineering on this basis isn’t cheap, and you are probably better looking at it at 3.66 for a 20% margin of safety.
Or are we thinking too much. There are some things that we can buy that we can accept a fair price because its business model is like fine wine, it gets better with edge.
And they can sustain long. Warren Buffett used to do this purchasing even at fair prices business with such strong economic moats.
SIA Engineering consistently enjoy a 20% ROE and 16% ROA, not just over a year but throughout that 8 year with a really bad bear market.
That to me is a sign of a model that we can pay fair value for.
The one thing that I realize is that the growth rate of earnings per year have been rather low as well as the free cash flow.
If there is an edge to this, we should see a 4-5% annual growth in these 2 segments. Perhaps competition is a bigger factor here.
Nevertheless, should you not be willing to pay fair value for an asset that at this point not showing the growth that is required, a lower share price might be necessary.
SIA Engineering might be the more stable cousin to SATS, or the more conservative one. The earnings doesn’t grow , but it doesn’t make risky acquisitions. Perhaps they do not need to.
Will I prefer SATS, not sure about that. Its been some time since I looked at it. I am not some investor who looks at a really big picture and think that will definitely be worth it for ANY price. Perhaps SATS will do much better, I dunno but I hope it shows me a better free cash flow profile than SIA Engineering.
As for SIA Engineering, its got really high investing cash flow. This is mainly due to the dividends from its joint ventures. This is a segment that up till 2011 we are very happy about growing at an astounding rate.
Then it stopped. We thought that is the jackpot for SIA Engineering.
Will it continue? Let us keep a close watch.