This is not going to be some deep analysis on SIA Engineering, and if you are interested in more about my thoughts of SIA Engineering and tis valuation you can refer to this Aug 2013 article where i talked about it more.
Yesterday, SIAEC and Boeing announced a joint venture where SIAEC will hold a 49% stake in the joint venture to offer fleet management services:
The joint venture will leverage on Boeing’s original equipment manufacturer (OEM) expertise and e-enabling technology, as well as SIAEC’s extensive maintenance experience and intimate knowledge of airlines’ engineering needs, to provide a customised and integrated suite of fleet management services to customers. The joint venture will offer service offerings for Boeing 737s, 747s, 777s and 787s.
Through the SIAEC/Boeing collaboration, airlines will be able to procure the full spectrum of engineering, materials management and fleet support solutions, thereby deriving higher operating efficiencies and greater upfront certainty in their fleet servicing costs.
My view of this is that it is more assuring that this deal is done versus the loss of competitive edge in the market. What we have been hearing is that, the aircraft manufacturers like Airbus and Boeing, are trying to strengthen the set of recurring income of their own, and creating a strong maintenance team.
Competing against your own supplier is a rather bad scenario, since if you are a client, and wants a maintenance contract, you can either go to SIAEC, or their competitors, or the supplier itself, say Boeing, now. Given that you have short listed the candidates based on reliability, efficiency the major evaluation is cost.
Since part of the maintenance provided by SIAEC and the likes involves Boeing, Boeing can quote these MROs a price with a 15% margin and then Boeing themselves quote a much lower price, since they operate themselves.
The net effect is that Boeing will always have a lower price compare to the MROs for the segment they provide.
This joint venture seem to indicate that when it comes to maintenance, the client’s are looking for a total solution, and this is where a MRO with many joint ventures with suppliers can afford a much better integrated solutions to the client.
If compete on this front, even inspite of the lower price provided by Boeing, they cannot provide a more competitive bid.
This JV makes sense, and the only question is whether Boeing only has an exclusive partnership with SIAEC versus the other MRO. The cost savings in the partnership makes them a better prospect.
At this moment we cannot quantify the operating cash flow improvement, whether there are any improvement at all. For investors who have studied SIAEC financial statements will note that much of their operating cash flow comes from joint ventures formed with various partners. It preserve their edge. This Boeing deal might turned out to be something more than the other joint ventures.
It will be interesting to see in the future whether there are any lost in sales from main revenue and a drastic increase in associates and joint venture cash flow (under Investing Cash Flow in Cash Flow statements)
Here is a snapshot from my Dividend Stock Tracker of SIA Engineering and the other blue chips (sans Vicom)
They are all rather low yielding compare to some time ago, even though for months they been gyrating and going no where. My view of SIAEC has not changed from the last report that at PE of 20, you are paying a certain premium for a sturdy business model, its safe relatively net cash position.
We can’t say PE of 20 is expensive, but you are paying for a sturdy edge that we have illustrated from this JV. This edge allows them to pay a much more consistent free cash flow versus another business that while they may pay consistent cash flow for a few years but faced future declining cash flows.
The airlines are here to stay and the industry grows long term at 5% per annum. JV like this preserves margins and thus you have a business that grows slightly above the GDP rates, providing growing dividends.
It looks rather fair value here. Unless my understanding is flawed, i might be too pessimistic about this.
Still our onus as investors is to ensure we don’t lose money, and that is to gain as much of margin of safety we can.
My margin of safety is to look for a conservative FCF estimate, in this case, a free cash flow yield that, in the worst case scenario that I can live with. In this case it will be something close to a 6% FCF yield
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