Bargain hunting leads to a pass
SIA Engineering (ticker S59)
The share price of SIA Engineering, a $3.6 billion Singapore-based and one of the world’s leading maintenance, repair, and overhaul (MRO) organization, recently fell to its six-year low for reasons not known by the management except for a JP Morgan selling its entire 38.9 million shares of the company.
Interestingly, SIA still exhibited a good premium to its price-book valuation at 2.3 times albeit lower than its 3-year average 3.1 times. The company also had a trailing dividend yield of 4.1% with 79% payout ratio.
According to filings, SIA is a one-stop maintenance facility in Singapore offers world-class MRO services to a client base of more than 80 international airlines and aerospace equipment manufacturers.
The company also has its growing portfolio of 24 joint ventures in 8 countries, forged with strategic partners and leading original equipment manufacturers. SIA also holds certifications from 27 national airworthiness authorities worldwide.
In its recent quarter that ended in June, SAI reported 0.4% revenue growth (vs. 3-year average -2.14%) to S$273 million and profits of S$36 million—a poor 81.8% drop (vs. 3-year average 7.75%) compared to its prior year period.
Nonetheless, the marked decline in the recent period was brought by SAI’s gain from its divestment of 10% stake in Hong Kong Aero Engine Services Ltd to Rolls-Royce Overseas Holdings Limited and Hong Kong Aircraft Engineering Company Limited. Excluding the impact of SAI’s divestment in the quarter ended 30 June 2016, profit for the current quarter was 4.7% lower vs. the initial 81.8% drop.
As of June, SIA had S$47 million in cash and cash equivalents and S$28 million in debt with debt-equity ratio of 0.02 times (vs. 0.02 a year earlier). Overall debt declined by S$8 million while equity rose by S$32 million to S$1.58 billion.
In the past three years, SIA allocated S$164 million in capital expenditures, raised S$42 million in debt, generated S$159 million in free cash flow, and provided $570 million in dividend payouts and share repurchases at an average ratio of 445% of SAI’s free cash flow.
SAI has exhibited still no positive revenue growth as of its recent quarter compared to its prior year of operations, while profits have also been in a little similar trend as of the recent period. Nonetheless, the Singaporean MRO service provider has demonstrated a strong balance sheet accompanied by hefty and generous amounts of payouts to its shareholders.
Using historical revenue decline rate and price-sales multiple averages followed by a 15% margin indicated a per share figure of S$3 vs. S$3.21.
In summary, SAI is a hold.
Disclosure: I do not have shares in any of the companies mentioned.