SIA Engineering Company

[Musicwhiz]

Dear all, Part 1 of my Analysis of Purchase for SIA Engineering is now up on my blog! Please feel free to visit and leave comments, thanks!

A snippet as follows:-

"SIAEC's Balance Sheet is very interesting as it contains no debt at all! One would have expected that a leading MRO player with technical capabilities would need to invest in a lot of fixed assets and hence would need a lot of gearing, but for SIAEC this is not true and this also adds to its attractiveness as an investment. Contrast this to ST Aerospace (Part 4 of this analysis) which has quite a bit of debt in its books. Apparently, capex is very manageable for the Group and is low compared to its revenues, and thus there is no need for leverage as internally generated cash flows (I will come to that in a while) are more than sufficient to cater for expansion, strategic alliances as well as staff salaries; with a lot to spare!"

[Musicwhiz]

This news will have significant impact on SIAEC, I feel. Which is why I am posting it in this thread, for comments. Will this mean a steady increase in MRO activities for all players in the industry?

Business Times - 17 Sep 2010

Airline industry needs over 1m workers: Boeing

Surge in demand for pilots, technicians to accommodate new, replacement aircraft.

By VEN SREENIVASAN

THE airline industry will need 466,650 pilots and 596,500 maintenance personnel over the next 20 years to accommodate the strong demand for new and replacement aircraft, according to a crew assessment forecast from American planemaker Boeing.

This is double the current number of pilots and a five-fold rise in technical personnel.

Boeing's Current Market Outlook says that airlines would need 23,300 new pilots and 30,000 new maintenance personnel per year from 2010 to 2029.

Boeing's forecast appears to be slightly below the forecast of the International Civil Aviation Organization, which calculates that global carriers will collectively need an average of 49,900 pilots a year from 2010 to 2030 as fleets expand, versus a current training capacity of only 47,025.

Boeing's forecast is based on average annual global economic growth of 3.2 per cent; airplane fleet growth of 3.3 per cent; and airline passenger traffic growth of 5.3 per cent; and cargo traffic growth of 5.9 per cent.

Roei Ganzarski, chief customer officer of Boeing Training & Flight Services, said that airlines would need these personnel as 30,900 new planes valued at US$3.6 trillion came into the market over the next 20 years.

'When you add up all the numbers, you quickly understand the issues facing this industry,' he said.

The largest growth in both pilots and maintenance workers will be in the Asia-Pacific region, where annual traffic growth is estimated to expand by 7.1 per cent. The region will require 180,600 new pilots and 220,000 technicians respectively from now until 2019; or 40 per cent of the pilots and 35 per cent of the mechanics needed worldwide.

Within Asia, China will experience the greatest need for pilots and maintenance personnel, at 70,600 and 96,400 respectively. China's air traffic is estimated to grow at 7.9 per cent.

South-east Asia - the home to SIA, Malaysia Airlines, Garuda, THAI and others - will need 42,200 new pilots and 47,700 new technicians. The region will require more than 2,500 new planes worth US$370 billion as its fleet size increases to more than 2,700 planes, according to Boeing.

Boeing estimates that North America would need 97,350 pilots and 137,000 maintenance workers; Europe, 94,800 pilots and 122,000 maintenance personnel; Africa, 13,200 pilots and 15,000 maintenance personnel; the Middle East, 32,700 pilots and 44,500 maintenance personnel; Latin America, 37,000 pilots and 44,000 maintenance personnel; and the CIS, 11,000 pilots and 14,000 maintenance personnel.

Boeing's estimates are similar to that of rival Airbus's forecasts for around 25,000 new passenger and freighter aircraft over the next 20 years, valued at some US$3.1 trillion. That works out to an average of some 1,250 new aircraft deliveries per year over the 20-year period, of which just over a third will be to replace existing aircraft and almost two thirds to meet growth.

'According to our current market forecast, we predict that the world fleet of in-service aircraft will double over the next 20 years from just under 16,000 today to around 32,000,' said Airbus's Singapore-based spokesman Sean Lee. 'If you average this out, it means an increase of around 800 in-service aircraft per year. In absolute terms, the requirement for additional flight crew to operate the aircraft should therefore be manageable, although this will of course need careful advance planning.'

Airbus's forecast for the in-service fleet is based on replacement of many of the existing aircraft and annual growth rates averaging around 4.7 per cent per year for passenger traffic and around 5.2 per cent for cargo.

Mr Lee pointed out that, historically, air traffic has doubled every 15 years and the industry infrastructure, including on the operational side, has 'so far been able to cope with this and there is no reason to believe this will not be the case in the future'.

In recent months, airlines, particularly in Asia and the Middle East, have been scrambling to poach pilots from rivals and recruit new trainees amid a looming shortage which has resulted in service cancellations.

Boeing's Mr Ganzarski noted that the current pilot shortage stood in stark contrast to the situation two years ago, when pilots were being laid off amid an industry slump.

'Things have flipped 180 degrees in just under two years,' he said. 'We were caught offguard by the speed of the recovery.'

He added that training methods will have to change to match the learning styles of future students, especially for Generation Y, who are mostly under 20 today.

'They are born into a technologically advanced world; they are surrounded by automation; they are avid communicators; they live in social networks, and they are consummate game players. They have short attention span and little patience. They want information when they want it.

'Our challenge is adapting our training to engage the future generation of people who will fly and maintain the more than 30,000 airplanes that will be delivered by 2029.'

Boeing Training & Flight Services, which has pilot training centres in 17 locations around the world, including Singapore, has been upgrading its training systems to match the needs of this new generation, he added.

The Singapore facility, which opened in January 2007, has the capacity to train 6,000 flight crew a year.

[yeokiwi]

The high ROE is nice but with a stagnant revenue, SIAEC probably will not see an increase in net profit. The high PE of SIAEC is both supported by its blue chip status and high dividend yield.

Airline industries are highly regulated by local governments. I don't think it is easy for SIAEC to break into India or China market on itself and I suppose these two countries will see the largest increase in their domestic flights in the future.

Hmm... maybe should take a look at HAECO..

[valueinvestor]

Hi yeokiwi,

Care to advise what company is HAECO, I could not find it on SGX. Thanks.

[kazukirai]

From Yeo-san's post, doesn't sound like it's a SGX co.

HAECO = Hong Kong Aircraft Engineering Company Limited? (website here)

[valueinvestor]

Tk U.

[yeokiwi]

ya.. kaz san is right.
But,HAECO is selling at a rather high PE..

Since airline industry is highly protected by every country, HAECO has the best chance to expand in China. I doubt China gov will allow SIAEC or ST Aerospace to enter China market. Same with India.

SIAEC will most likely unable to expand much overseas except to those countries that have no expertise to perform aircraft MRO but these countries are also unlikely to have a big domestic air travel market.

In the way, SIAEC is a good blue chip and dividend play. But just like SPH, they have no way to expand further.

In fact, with cheaper labour in China, SIAEC may face cost pressure in the near future.

But,that is just my gut feelings.. Most likely it is not accurate haha...

[Musicwhiz]

The high ROE is nice but with a stagnant revenue, SIAEC probably will not see an increase in net profit. The high PE of SIAEC is both supported by its blue chip status and high dividend yield.

Airline industries are highly regulated by local governments. I don't think it is easy for SIAEC to break into India or China market on itself and I suppose these two countries will see the largest increase in their domestic flights in the future.

Hmm... maybe should take a look at HAECO..

Hi yeokiwi,

From my research, I've found out that SIAEC has a strategy of growing net profits through JV and Associated Companies formation; rather than growing their core business top-line revenue. This is why you do not see a very sustained increase in top line in the last 10 years for SIAEC. As you rightly said, the high PER and high P/B is a result of the business model in which there is excess FCF, high ROE and very negligible debt.

There is a part of my research in which I touch on the JV structure and progress for SIAEC over the last 10 years; and it will show that they have had at least one new JV or Assoc Company every 2 years. Thus, the bottom line grows due to higher share of profits from associates/JV and the cash dividends from this area are also growing (look at Investing Cash Flows in the Cash Flow Statement).

As a comparison, I did do one for HAECO which will be featured later on my blog under my Analysis of Purchase. Some of the key numbers:-

1) Operating Margin - HAECO 10-year average 13.7%, SIAEC 10-year average 13.9% [Quite comparable]

2) Net Profit Margin - HAECO 10-year average 20.2%, SIAEC 10-year average 23.1% [Much better for SIAEC]

3) Current Ratio - HAECO 8-Year Average 1.89, SIAEC 10-year average 2.49 [SIAEC has higher current ratio]

4) Debt - HAECO had debt:equity ratio of 0.22 for FY 2009, SIAEC had zero debt for FY 2010

5) ROE - HAECO 10-year average 16.9%, SIAEC 10-year average 22.5% [SIAEC consistently higher ROE]

6) Investing cash flows have been -ve for HAECO for 5 out of the last 8 years; for SIAEC investing cash flows turned positive from FY 2006 and stayed that way till present.

7) Capex as % of revenues - For HAECO it has been about 17.6% for FY 2009, while for SIAEC it has been low at just 3.9% for FY 2010.

As a result of the above, I concluded that SIAEC has firmer financials and fundamentals as compared to HAECO.

[yeokiwi]

Given the limitations imposed by the industry, SIAEC had done relatively well in their JVs. They have to do so if they want to grow their revenue.

But, if the list of JVs is examined,
Australia - line maintenance services
China - 10% share in aero engineering,47% share in line maintenance service
Indonesia - 49% in line maintenance service.
Ireland - 49% share in engine MRO
Philippine - 65% share with hangars for MRO
Taiwan - 25% share in overhauling compressors
USA - 100% share in line maintenance.

Except Philippines, SIAEC is offering mainly line maintenance services in airports.
For MROs, the planes will have to either fly to Singapore or Philippines for servicing.

I remembered SIA engineering was supposed to form a JV in india to perform MRO services. However, I did not see the JV being listed in SIAEC website.

I did a search using google and I found the following links. Apparently,the JV is likely to be called off. The MOU was signed in 2006 but the JV has not even taken off in 2010.
http://www.siaec.com.sg/press_release/20...ul2006.pdf
http://www.livemint.com/2007/09/24012317...d.html?d=1

Compared with HAECO, I had extracted the following info from their AR 2010.

Investments
Notwithstanding the current difficult operating environment, the Group
has continued to invest in projects designed to expand its facilities and
the range of aviation maintenance and repair services it can offer to
customers.
HAECO opened its third hangar in Hong Kong in September 2009. Taikoo
(Shandong) Aircraft Engineering Company Limited opened its fifth hangar
in Jinan in May 2009. Taikoo Spirit AeroSystems (Jinjiang) Composite
Company Limited opened its specialist composite repair facility and
Dunlop Taikoo (Jinjiang) Aircraft Tyres Company Limited opened its tyre
retreading facility at Jinjiang in Fujian Province in November 2009. Taikoo
(Xiamen) Aircraft Engineering Company Limited ("TAECO") is expected to
open its sixth hangar in the first half of 2011. Hong Kong Aero Engine
Services Limited ("HAESL") is constructing a component repair extension
which is planned to be operational in the first quarter of 2011. Taikoo
Sichuan Aircraft Engineering Services Company Limited is constructing its
first hangar in Chengdu, with operations scheduled to commence in the
second half of 2010.

HAECO is now facing a tough time in filling up their hangars and idling work force in mainland China due to reduced MRO and conversions.
But, I thought it is a matter of time that the capacities will be utilised.
And, I suppose HAECO will list their TAECO in China once it is profitable.

HAECO has good growth potential and SIAEC has good dividend. hehe..

[Musicwhiz]

Hi yeokiwi,

Thanks for the very detailed and insightful information, coupled with analysis of the JV companies. I"ve come up with something similar in MS Excel format as well and will post it up in Part 3 of my Analysis of Purchase. In the meantime, let me comment on what you have posted....

You said apart from Philippines, SIAEC is mostly doing line maintenance. However, I think you should include Ireland and Taiwan as well in the list as the JV/Assoc Companies there are doing repair and overhaul of engine cases, as well as Repair and overhaul of PW4000 high-pressure compressor stators respectively. These will constitute MRO services.

In addition to these, and which was not in the Annual Report's main financial section, was the establishment of a facility in Bahrain (MOU with Gulf Technics) to perform MRO for the Middle Eastern market. However, since it is just an MOU, it will need time for a formal contract to be signed. So SIAEC is also trying to expand their MRO market share and there are ample opportunities in Middle East for them to expand into.

You are correct about the JV in India - I think it did not come to fruition but then again, business being business, such things do occur from time to time. The important thing is that the Company continues to seek out growth avenues and this is evident from the numbers.

SIAEC is also exploring providing line maintenance services for Vietnam's Tan Son Nhat Airport in Ho Chi Minh City (HCMC). An Agreement was signed in Feb 2009 but thus far there is no announcement on this, so I guess we will have to treat it as being in "limbo" for now. Since SIAEC has a good track record of aggressively pursuing and concluding JV agreements and setting up associated companies, I continue to have faith that the Company will be able to grow its JV/Assoc base so as to garner more share of profits, as well as higher cash flows from Investing Activities in terms of dividends.

Note too that the latest Assoc Company formed (49% stake) was with internationally renowned Safran Group, and SIAEC will provide avionics maintenance, repair and overhaul services which is part of MRO. This JV was just concluded in June 2009.

I also view SIAEC's move to have a stake in P&W's engine developments for the C-Series aircraft engine program (3%) and the MRJ aircraft engine program (1%) as being an innovative way to partake in the share of profits arising from this new business segment.

To be honest, I was merely comparing HAECO and SIAEC based on numbers and financials, as per my previous post. Definitely, HAECO has potential to grow due to it being located in Hong Kong and its proximity to China (and China is booming). However, if you examine metrics such as ROE, Net Margin and also % of capex, the numbers from SIAEC are better. So I will not totally agree SIAEC is simply good for cash flows while HAECO is good for growth. Both have a good mix of both cash flows (dividends) and growth, but an investor should choose the company in which he feels more comfortable in to invest.

For me, I chose SIAEC based on the aforementioned reasons.

Cheers!