In part two of our series of articles, we put the nuts and bolts of our national carrier under scrutiny. The aircraft flying under Singapore Airlines, Singapore’s national carrier, are maintained, repaired and overhauled by subsidiary SIA Engineering.
But what gives? Isn’t SIA experiencing increasing challenges to its dominance in the full-service flight arena? Why feature its subsidiary? Well, just as how families go, it does not mean a child would do worse off and just as bad as the parent.
This is particularly true in this case as both companies exhibit different core businesses and management even though there is no doubt that they have to work hand in hand in the aviation industry. However, while SIA might be facing some setback with growth, SIAE is flourishing with its expansion.
At the Changi Airport, SIAE equips line maintenance to more than 50 airlines, including airframe and component overhaul to some of the most advanced and widely use commercial aircrafts like Cathay Pacific and Royal Brunei Airlines.
Complementing their full spectrum of Maintenance, Repair and Overhaul (MRO) services, they now have 25 joint ventures in 9 countries and a client base of more than 100 international carriers and aerospace equipment manufacturers. One of such joint ventures includes the prestigious Rolls Royce, specialising in engine overhaul and repair.
Source: SIAE Annual Report 2012/2013
More Than Just Nuts And Bolts
While we are on the topic of the thriving MRO industry, I would like to point out three core services of SIAE business. Amidst challenging operating environments due to global economic uncertainties over the past five years, we can still see the sustainability and growth of SIAE in terms of network and clients.
1. Line Maintenance
Ever see technicians scurrying around the aircraft just before you board? They are carrying out what is called, line maintenance. Basically, maintenance just before an aircraft goes airborne.
Till date, SIAE provides line maintenance to 28 airports in Singapore, Hong Kong, Indonesia Philippines, Australia, Vietnam, USA and others. It also handles more than 650 flights daily round the clock for more than 80 airlines across an international network.
Source: SIAE Analyst Briefing 2013
2. Aircraft and Component Services
The strategically located hangar premises of SIAE enables them to churn a fast turnover time for clients. They certify more than 20 Airbus and Boeing aircraft models, as well as providing international approvals for overhaul of components.
Source: SIAE Analyst Briefing 2013
3. Fleet Management
The company caters fleet and inventory technical support to 12 airlines in nine countries which consists of 145 aircraft. These clients include many popular airlines like Air Pacific, Royal Brunei and Tiger Airways in Singapore and Australia. in FY13, SIAE also managed to renew a five-year contract worth $166 million with Cebu Pacific.
Source: SIAE Analyst Briefing 2013
The Numbers Behind Enabling Aircraft To Fly
Source: SIAE Analyst Briefing 2009-2013
After the market crash in 2008, most of SIAE’s operating segments have been spotting a rising trend in revenue since 2009. This is especially evident in 2010 when all operating segments registered growth.
Over the course of four years from 2009, the airframe and component overhaul segment has seen a compounded annual growth rate (CAGR, used for measuring growth on a percentage basis over a period of time) of 2.45 percent.
On the other hand, line maintenance have been continually doing well with a CAGR of 2.64 percent for 5 years since 2008. This is due to fruitful expansions of client lists and new contracts.
The mentioned rise in revenue was mainly contributed by higher fleet management programmes, increasing fleet size of existing customers, and new bonds secured. The CAGR for Fleet Management has since grown a sizeable 17.79 percent from 2008 up to 2012.
However in 2013, higher fuel costs was the most probable culprit for the decline in contributions from that segment. Nevertheless, SIAE remains one of the world’s largest fleet management services.
Source: FactSet, SIAE Income Statement (Audited) from FY2009 to FY2013
Observing the pattern of revenue throughout the past five years, we can perceive a rising trend from 2010. Apart from the growth in operating segments, share of profits from associated and joint venture companies made up a colossal 52.0 percent of pre-tax profits in FY13, the highest contribution till date.
The 16.2 percentage rise in revenue from 2010 to 2012 was primarily contributed by higher fleet management programmes with an increase in fleet size, more airframe and component overhaul work and projects. However, revenue declined 2.0 percent in 2013 as lower fleet management and lesser project revenues were caused by higher fuel prices and material costs.
Despite the volatility in revenue noticed from 2010 to 2013, net profit has appeared to be rather stable. Although there was a significant increase in revenue from 2010 to 2012, expenditure was higher at the same time.
This was due to higher staff and subcontract costs to support the increase in workload. While revenue in 2013 decreased, expenditure was also further reduced by 2.1 percent to US$1018.6 million. Lower expenditure was largely possible with the decline of 19.3 percent in subcontract and lower material costs.
Rewarding Shareholders With Cash
Source: SIAE Annual Report 2013
If you are seeking to invest in a company that requires almost no worry for a long period of time, SIAE offers you exactly that. Compared to its parent company (SIA) where no dividends were paid during bad times, SIAE has kept an immaculate record of high dividend payouts since 2007. SIAE’s dividend payouts have averaged roughly 93.4 percent of net profits.
Dividend payout in 2011 was especially high due to a special dividend of $0.10 on top of a final dividend of $0.14 and an interim dividend of $0.06. Apart from that one-off payout, dividends for the next two years have remained stable.
Taking On The World
International Air Transport Association’s (IATA) Director General and CEO, Tony Tyler, recently expressed that while global economic performance remains a concern, demand for air travel continues to expand. The primary driver comes from growing demand for connectivity to emerging markets.
Industry restructuring in Japan coupled with the growing domestic market in China has influenced a rise in business and consumer confidence levels. This might indicate an uptick in the global business cycle which has a direct impact on airline profitability.
As the global economy continues to recover, SIAE continues to remain well positioned to sustain its growth and seize emerging opportunities. Together with the aviation industry, it bolsters the international market by supplying a maintenance network that drives trade and commerce.
Not resting on its laurels, SIAE is striving to be a one-stop maintenance solution in the industry. To achieve this in Singapore, SIAE has converted one of its six hangars to a state-of-the-art airframe painting facility which complements their world class MRO services provision.
Recent joint ventures have also given the company valuable access to the markets of associated companies at the same time acquiring proprietary knowledge and processes.
Analysts’ Take On SIAE
Since 2000, the share price for SIAE has since been rising up to $5.32, a record high. With this seemingly steady uptrend, analysts contend that SIAE could rise to about $5.24 as depicted by the graph below.
Source: FactSet, SIAE’s consensus calls by analysts.
Across the broad spectrum of ratings, we note that analysts have generally bought into the growth of contributions from SIAE’s joint ventures and associates. They expect that segment of contributions will continue to be the main driver of SIAE’s future earnings.
On top of that, the growth story of Asian travel demand continues to be highlighted across many reports from analysts. In fact, sources from IATA reported that the Asia Pacific pervades 30.2 percent of the total passenger traffic market shares by region of carriers in terms of Revenue Passenger Kilometers (RPK).
Domestic Growth Opportunities Aplenty
With the recent unveiling of Singapore’s urban development master plan, SIAE can look forward to increased capacity and possibly new clients coming on board. This is particularly so with project jewel and plans to build a fifth terminal at Changi Airport.
Besides the development plans to Changi Airport, SIAE will look to its parent, SIA for increased work activity. This comes after SIA recently announced the purchase of 60 new aircraft in a $21 billion mega deal.
That’s All Sweet But What Can You Do?
It is clear that price has been flirting within the range between Fibonacci retracement levels 38.2 percent to 50 percent. Decisive breakthrough of the 38.2 percent level was seen via the longer white candle yesterday (25/11/13) and the close above the 38.2 percent region is a positive sign, signalling good buying momentum.
This is coupled with the RSI, which is slowly turning up from its oversold region at 30, and is seeking to move towards the 50 line. The buying momentum will be further reinforced if the RSI rises and cuts through above the 50 line, together with more candles closing above the 38.2 percent region.
Immediate resistance is at $4.99, followed by $5.02, and the 23.6 percent Fibonacci retracement at $5.028. Immediate support levels seen are at the 38.2 percent resistance turned support Fibonacci retracement level at $4.946, and $4.91.
So, if you fit the bill of a modern homemaker, or (more likely) if you find that you are looking for a safe and dividend yielding stock, perhaps you might want to cast your gaze on this counter.
Besides, in all extreme likelihood, we will not see SIA Engineering disappearing from the face of the earth anything soon, right?