Is SIA Engineering a GOOD Buy Now? (SGX: S59 / S59.SI)

Business Background

SIA Engineering Company (SIAEC) Limited is based in Singapore and was incorporated in 1982.

SIA Engineering was part of Singapore Airline until 1992, Singapore Airlines transfer its maintenance, repair and overhaul activities (MRO) into an existing subsidiary to form SIA Engineering Company.

SIA Engineering provides service to over 200 flights into and out of Singapore Changi Airport each day for more than 60 international passenger and cargo carriers

Segments of Business

1. Airframe and Line Maintenance
2. Engine and Component

Airframe and Line Maintenance

Service provided in these sub segments.

• Airframe maintenance
• Line maintenance
• Fleet management programs

Service Provided

• Schedule routine and specialized maintenance and overhaul
• Modification and refurbishment programs
• Aircraft certification
• Technical and non-technical ground handling services
• Provision of aircraft ground support equipment and rectification work
• Fleet technical management
• Inventory technical management services

Engine and Component

Service provided in these sub segments.

• Component overhaul
• Engine repair
• Overhaul services

Service Provided

• Manufactures aircraft cabin parts and tooling for the aerospace industry
• Repair and overhaul services for hydro-mechanical equipment for aircraft
• Engine maintenance, parts repair, storage and preservation, material management, on-wing, and engine testing services

Join Ventures

SIA Engineering has invested in 23 joint ventures on manufacturing of original equipment manufacturers, or OEMs, aircraft component repair, engine component repair and overhaul services in both Singapore and overseas.

• Singapore, Australia, China, Hong Kong, Indonesia, the Philippines, Taiwan and Ireland.

DEBT TO EQUITY RATIO

Check for: Less than 0.5 D/E Ratio

Looking at the latest financial report for Year 2021.

SIA Engineering have a D/E ratio of 0.055.

This is much lower than 0.5 D/E Ratio.

D/E ratio of less than 0.5 will means that the company will be able to fulfil their debt obligation and there is low risk of the company defaulting.

With a D/E of lower than 0.5, it pass my criteria.

To understand this stock better, I’ve done a quick look at the past Debt to Equity Ratio for SIA Engineering:

Looking at the past data of SIA Engineering, it seems that the D/E ratio have always been less than 0.5, and in fact it have always been less than 0.1 D/E Ratio.

The D/E ratio only start to increase after the outbreak of the pandemic in 2019 which is reflected by the increase in D/E ratio in year 2020 and 2021.

Even when SIA Engineering business is highly depending on the aviation industry, the recent pandemic must have probably impacted SIA Engineering bottom line greatly.

But from the D/E ratio, it shows that the company is able to keep it’s leverage low even in the times of trouble.

The company have less than 0.5 D/E ratio

My Opinion: Pass

Dividend Yield

Check for: More than 2.5% dividend yield

For Year 2021, SIA Engineering pay a dividend of SGD 0.00 which is about 0.00% in dividend yield.

SIA Engineering did not pay any dividend for the year 2021.

0.00% yield is lower than my target of 2.5%.

Looking at the distribution history, the last dividend payment is in year 2020, which is probably due to pandemic.

For dividend stocks, I’ll prefer if they will pay a stable dividend that is growing.

The dividend yield is also much lower than the risk free rate (CPF OA Account) of 2.5%. I will give it a verdict of fail.

My Opinion: Fail

Dividend Payout Ratio

Check for: Less than 80% dividend payout ratio

At the time of writing, I’ve done a quick check with online tools for stocks info, it shows that the dividend payout ratio for SIA Engineering is a 0.00% which basically make this section non-applicable.

With a payout ratio of 0%, it means the company retained all earnings if any, and did not payout any dividend for the financial year.

Although SIA Engineering did not payout any dividend for 2021, I think it is the right decision.

It is better for the company to have enough cashflow to operate the business, especially when the business is greatly impacted by the pandemic.

Although SIA Engineering fail this section, it may still be a good dividend stock in the future.

My Opinion: Fail

EPS Growth Rate

Check for: More than 10% EPS Growth

Earning Per Share (EPS) tells us about the profitability and quality of a company, it is one of the most important metrics for an investor.

Here, we will like to see an EPS growth of 5 years or more.

Quick check on the 2021 financials.

The EPS 5 year growth rate is “Blank”!

There is no Earning Per Share (EPS)  growth for SIA Engineering!

Knowing SIA Engineering is in the aviation industry, low EPS is understandable due to the pandemic. Thus we will deep dive into the EPS history to understand the company further.

Lower EPS for 2021 is probably due to the pandemic.

Even so, I may not want to invest in a company that is not growing it’s EPS.

My Opinion: Fail

High Return Of Equity (ROE)

Check for: More than 10% ROE

ROE is the most important metric that I value.

Return of Equity (ROE) is often used to measure the management’s ability to make money.

At the time of writing, the ROE of SIA Engineering have an ROE of -0.7%.

A deep dive into the history of SIA Engineering shows that it’s ROE turns negative in 2021.

SIA Engineering historical ROE shows to be above 10% ROE before the pandemic. Even in 2020, it is still able to maintain a high ROE. But in 2021, it have a negative ROE of -0.7%.

Negative ROE is probably due to the pandemic and it is temporary.

Although SIA Engineering may have great future potential as a good dividend stocks, a negative ROE will mean that it is losing shareholder’s equity at 0.7% per year.

My Opinion: Fail

PRICE-TO-BOOK RATIO

Check for: P/B Ratio of less than 1.8

SIA Engineering have been around for almost 40 years, and if an investor invest in SIA, they will probably know SIA Engineering.

If I have to guess it’s P/B ratio, the price of the stock will most likely be traded around it’s valuation (book value).

At the time of writing, the current P/B ratio of SIA Engineering is 1.594.

Meaning, it is trading slightly above its book value.

My Opinion: Pass

MOAT

Check for: Not just having a MOAT, but a great MOAT

SIA Engineering is probably the most important company that ensure the smooth operation of aircraft coming in and out of Singapore Changi Airport.

Similar to SATS which provides food for the plane, SIA Engineering provides all the services required for an aircraft to fly safely in the air.

SIA Engineering is the only major aircraft servicing centers that services all aircrafts that come in and out of Singapore Changi Airport.

SIA Engineering’s Top Competitors

1. SIA Engineering, service in Singapore, Philippines
2. Aviation Technical Services (ATC), service in United States
3. Hong Kong Aircraft Engineering (HAECO), service in Hong Kong, China, United States
4. ADC Engineering, service in United States
5. Interstate Engineering, service in United States

SIA Engineering Licensing

More than twenty national aviation regulatory authorities have issued approvals to the company to provide maintenance, repair and overhaul services to aircraft subject to their jurisdiction.

• Civil Aviation Authority of Singapore (CAAS)
• United States Federal Aviation Administration (FAA)
• European Aviation Safety Authority (EASA)
• Japan Civil Aviation Bureau (JCAB)
• Etc.

With it’s base in Singapore, SIA Engineering serve over 60 airlines passing through Singapore.

In terms of MOAT, SIA Engineering have a strong ” Toll Bridge MOAT”.

Not only it requires the government to issue licensing to allow the operation of companies such as SIA Engineering.

Approval from the authorities from the different countries is required for operation of a company similar to SIA Engineering.

Toll bridge moat prevent competitors from coming into the picture, allowing SIA Engineering to have most of the business that comes through Singapore Changi Airport.

With Singapore Changi Airport rising to become one of the busiest airport in the world, I think SIA Engineering will have a bright future without many, if any competition.

In my opinion, SIA Engineering’s MOAT is very strong.

My Opinion: Pass (Great!)