SIA Engineering Company

[csl123]

Usually the best chance to invest in a quality company like SIA Engineering is during a downcycle. Longer term, Changi should remains as a world leading airport/transport hub so business will be there, its just a matter of earning more or less, tough times also still earn.

-n v on radar-

Maintenance business of SIAEC is not a direct function of growth of airport traffic. Line maintenance business will grow as it is basically a captive business. Turnaround and technical handling services will need to be done by a local MRO player. In this case SIAEC stands to benefit.

But airlines need not necessary choose SIAEC for base/heavy maintenance, which are long down time in nature. Since base maintenance are feeder business to components business, and to a lesser extend engine business, the periphery business (components, engines) will be affected if base maintenance business declines. Contracts for base/heavy maintenance are awarded based on quality, turnaround time and price. Base maintenance dovetailing a revenue flight is more of a bonus. Separately, next gen aircraft also require lower base/heavy maintenance, and this further compounds to the future business prospects of SIAEC.

Quality wise I cannot be sure. See the link below. ST Aerospace(SASCO) wins a Singapore Airlines A330 maintenance contract. How can SIAEC lose an SIA maintenance business, that is captive in nature? Its either SASCO is very good, or SIAEC has quality issues. Either case, its bad news for SIAEC.
http://www.aviationpros.com/press_releas...upport-sia

Yes future prospects dun seem to be looking too good at the moment.
question is will SIA Engineering ever become loss making?

If the answer is probably not, then to invest in this company, it will just be a matter of judging where the earnings might be bottoming out and at what price is a cheap price to buy the business and assets.

So long one is not buying into a story of growth, I am pretty sure SIA Eng will continue to bring in the money, though the story may be very boring in the years to come. Note balance sheet is still pretty solid with Net cash of almost 10% of Mcap.

Do note that the company is slashing dividends (2014 : Interim - 7 cts, Final -13 cts, Special -5 cts. 2015: Interim- 6 cts , Final 8.5 cts ) to maintain its net cash balance. The amount of money for distribution to shareholders is significantly reduced compared to the past 5 years (~21 cts per year). Most investors looking at this equity for dividends will need to adjust to much lower dividends in the years to come.
Assuming that investor is looking at 5% yield and the company is able to pay 14.5cts each year moving forward, I am looking at $2.90 valuation.

But personally, I have little confidence the company can adapt in the new MRO market. So a constant 14.5 cts dividend is not probable.

[cfa]

SIAE has more competitors than before , its prime seems over .

[csl123]

Silkair is retiring its fleet of A319/A320 and replacing them with Boeing B737NG and B737MAX. The reduction in revenue from A319/A320 from FMP services is expected. The question to ask is, whether they are able to secure fleet management services for B737NG/MAX.

Thks for the info - inline with my guesses that the scope for the contracts are different.

How do you think the change in fleet will affect the MRO arm (not just the FMP)? B737MAX uses the CFM LEAP (I think A320neo has the option to use CFM as well) - does SIAEC has the capability to perform MRO on these engines?

A visit to SIAEC's website shows it being able to service the below GE engines:

GE90-115B series
GE Snecma CFM-56 series
GE CF6-80 series
GE CF6-50 series

There is a possibility that 737 fleet management will not be carried out by SIA Eng, but through the JV with Boeing. But whether that venture is successful, will be hard to tell at this time. Either case, SIA Eng, loses in the short term, which I had discussed in previous posting.

I think you are referring to SIA Eng joint ventures (ESA and SAESL). There are no engine overhaul capabilities within SIA Eng.
No they do not have LEAP engines capabilities as reflected in their website. Getting it will require airlines support during the aircraft purchase.

[CityFarmer]

MRO sector remains challenging. Are other MRO operators facing similar situation?

(not vested)

SIA Engineering posts 23% fall in 1Q earnings to $41.3 mil

SINGAPORE (July 27): SIA Engineering Group ( Financial Dashboard) posted 1Q15 earnings of $41.3 million, a decrease of 22.8% compared to the corresponding quarter last year.

Basic earnings per share was 3.68 cents, down 23.2% from 4.79 cents a year ago.

Profit in the same quarter last year included a $5.8 million gain from the restructuring of one of its subsidiaries. Excluding this gain, earnings to owners of the parent in this quarter would have decreased $6.4 million or 13.4%.
...
http://www.theedgemarkets.com/sg/article...gs-413-mil

[AQ.]

MRO sector remains challenging. Are other MRO operators facing similar situation?

I attended the AGM last week - thought the Chairman was transparent in his replies to queries.

I think he summarised it well in that the industry is at a crossroad with structural changes due to technology improvements and new OEM contract terms to airlines. So biz operating modes have to change - and SIAEC needs to restructure and has chosen to partner with OEMs (hopefully they get chosen due to strong parentage links). Whether the mode will work out in the long run is anyone's guess, but that's the route management has chosen.

The industry has changed and the restructuring (which will take years and not mths) means margin//revenue//profitability changes fundamentally. The fact that a capable management (which I like quite a lot) is not able to prevent a loss at the MRO level even with a healthy leadtime spells out the severity of the structural headwinds.

[natnavi]

SIAE has more competitors than before , its prime seems over .

Hi cfa, I do not see any new MRO companies in Singapore.

May I know which new competitors are around.

Vested in SIAEC 's competitor.

[CityFarmer]

MRO sector remains challenging. Are other MRO operators facing similar situation?

I attended the AGM last week - thought the Chairman was transparent in his replies to queries.

I think he summarised it well in that the industry is at a crossroad with structural changes due to technology improvements and new OEM contract terms to airlines. So biz operating modes have to change - and SIAEC needs to restructure and has chosen to partner with OEMs (hopefully they get chosen due to strong parentage links). Whether the mode will work out in the long run is anyone's guess, but that's the route management has chosen.

The industry has changed and the restructuring (which will take years and not mths) means margin//revenue//profitability changes fundamentally. The fact that a capable management (which I like quite a lot) is not able to prevent a loss at the MRO level even with a healthy leadtime spells out the severity of the structural headwinds.

Thanks for the input. You means OEMs, e.g. Rolls-Royce, are taking over the MRO business?

(not vested in any MRO)

[sgd]

I hear MRO is a highly profitable business somebody once told me every time planes take off and land they burn up several thousand worth of consumables that need to be replaced and usually many like P&W Boeing GE bell will setup shop near to where the Americans have a base presence and there are over 1000 bases overseas or allies like singapore thailand that also own American equipment.

Much like the Romans of ancient times who had bases all over europe an expensive devouring monster that needed a lot of resources and that means it fed a lot of people until it went bankrupt.

[AQ.]

Thanks for the input. You means OEMs, e.g. Rolls-Royce, are taking over the MRO business?

From what I understand rudimentarily:

Contract terms with airlines have changed with the OEMs. In the future, OEM's sale prices will be a function of time-in-air and in return, airlines give the MRO contract back to OEM. This aligns both parties' interests - the airline gets lower turnaround time and more flights (hopefully) and the OEM gets the MRO income (at the expense of needing to ensure reliability).

The rest of it is pretty hazy. Will the OEMs prefer to work with a regional partner or go alone (seems to me the former might be better capital-wise)? If they choose a partner will they choose SIAEC(esp given the current partnerships and SIA parentage links)? What kind of margins compared to that currently?

Structurally things have changed and it's not business as usual.

[weijian]

Thanks for the input. You means OEMs, e.g. Rolls-Royce, are taking over the MRO business?

From what I understand rudimentarily:

Contract terms with airlines have changed with the OEMs. In the future, OEM's sale prices will be a function of time-in-air and in return, airlines give the MRO contract back to OEM. This aligns both parties' interests - the airline gets lower turnaround time and more flights (hopefully) and the OEM gets the MRO income (at the expense of needing to ensure reliability).

The rest of it is pretty hazy. Will the OEMs prefer to work with a regional partner or go alone (seems to me the former might be better capital-wise)? If they choose a partner will they choose SIAEC(esp given the current partnerships and SIA parentage links)? What kind of margins compared to that currently?

Structurally things have changed and it's not business as usual.

I did not go to the AGM, but some of what you wrote puzzles me.

SIAEC has been working with OEMs for a long time. The way you put it, sounds like this working model is revolutionary. Its repair/overhaul JVs - Eagle Services (with Pratt and Whitney) and SAES (with Rolls Royce) are the main money spinners of its 'don't-know-how many-but-it-doesnt-matter JV/associates. OEMs will refer to work with Airlines rather than going on their own, because the relationship is symbiotic in nature - I am SIA and i am going to order XXX planes fitted with ABC engine as long as you start a JV with me and share your R&D...It is not about capital because it doesnt take much capital to setup a repair shop (you just need to rent the space and spend more on operating costs to employ the right expertise)

The main decline in SIAEC's revenues/bottomline is NOT because of how the contract nature with OEM have changed. Read back the last 9months worth of discussion in this thread (hint: read csl123's posts) Rather, the current fleet of planes that SIAEC used to service, are going out of commission soon. The new generation of planes require less maintanence (damn! how can the FAA agree to this!) and more importantly, Eagles/SAES does not have the expertise (yet) to repair/overhaul the new engines that these new planes are on, hence losing their competitive advantage.