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SIAEC share price crashed to 5 year low

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SIAEC share price crashed to 5 year low! Amid the global economic uncertainties and challenging aviation outlook, SIAEC’s performance continued to slide as revealed in the financial results for 1HFY2016/17. This article contains my latest SIAEC stock analysis. I am not vested in this counter but have been monitoring this maintenance, repair and overhaul (MRO) stalwart for many years.

Operating profit for 2nd quarter declined to $24.5 million as compared to $27.0 million last year. Cash flow from operations was a negative $7.4 million as compared to positive $2.4 million in the previous year. The dismal quarter results reflected the massive challenge faced by the management in navigating SIAEC through this storm.

It is certainly not business as usual for this MRO powerhouse as airlines are buying new aircraft like A350, B787, A320NEO and B737-MAX to replace their older fleets. These new aircraft require less maintenance checks and longer maintenance task intervals, especially in the first few years of entry into service. Arising from this new trend, the MRO sector in Singapore has seen a decline in business for the last 2 years. This is because about 90 per cent of the local aerospace work is tied to aircraft maintenance and repairs.

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For SIAEC, the outlook is indeed gloomy. Although 1st half performance recorded a profit attributable to owners of the parent of $233.9M, an increase of $148.1M, the result was largely due to the divestment of one of its units, HAESL. Operating profit for the first half of the financial year before the provision was $44.2M, a decrease of $3.7M or 7.7%. Usually I would give less credit to financial engineering tactics used by management to bolster financial profits and focus instead on the company’s core operating results.

Nevertheless, SIAEC continued to hold one of the strongest balance sheets among the SGX-listed companies. Net current assets was $667.4 million and non-current liabilities at only $53 million. The company remained cash rich, with cash balance increased $145.9 million or 37.0% to $539.8 million, mainly due to the cash consideration received from the divestment of HAESL and dividend received from HAESL following the divestment of its stake in SAESL, partially offset by payment of the final dividend.

With such strong financial position, SIAEC is poised to ride out the current storm, provided the management is able to strengthen the investment moats prudently. Even though the aviation maintenance industry is undergoing structural changes brought by new technological aircraft, ultimately every aircraft requires maintenance checks in order to be certified as airworthy under the aviation regulation. Thus, in order to grow, SIAEC needs to continue to grow its lucrative Aircraft and Component Services business unit in the South East Asia region.

There is a perceived notion that SIAEC relies on its parent company, SIA, for its revenue growth. Thus, most investors assume that when SIA is facing declining passenger loads, SIAEC’s business will be affected as well. Actually, this is a misconception because SIAEC derived most of its business revenue from non-SIA work.

For the current 1st half, 68% of its revenue came from non-SIA work, an increase of 4% from last year. Revenue from non-SIA amounted to $1.53 billion for the first half while SIA work constituted $708 million of revenue only. In this regard, management has done well in diversifying SIAEC’s business portfolio and mitigating the risk of relying on SIA for growth.

Following the divestment of HAESL, the management wasted no time in streamlining its operations to enhance operating efficiencies. During the quarter, they completed the merger of Singapore Aero Engine Services Pte Ltd and International Engine Component Overhaul Pte Ltd. Then in November 2016, SIAEC announced the integration of its joint venture companies with Pratt and Whitney, Component Aerospace Singapore Pte. Ltd (“CAS”) and International Aerospace Tubes-Asia Pte. Ltd. The rationales for these moves are the economies of scale and synergies from the streamlining of the business processes.

To spur growth in its Line and Heavy Maintenance arm, SIAEC has formed a joint venture with Airbus Heavy Maintenance Singapore Services Pte Ltd (“HMS Services”) provide airframe maintenance, cabin upgrade and modification services for Airbus A380, A350 and A330 aircraft families in Asia-Pacific and beyond. SIAEC holds a 65% equity stake in HMS Services and Airbus holds the remaining 35%. On 22 December 2016, SIAEC also formed a joint venture with Moog Inc. to provide maintenance, repair and overhaul services for Moog’s products, which include components on flight control systems for new-generation aircraft, such as the Boeing 787 and the Airbus A350.

All these initiatives by SIAEC are long-term investments to increase its competitiveness and investors should not expect to see the positive impacts in the short-term. Thus, SIAEC share price will continue to be affected by the current structural changes in the industry. Share price has tumbled from $5.29 in 2013 to a 5 year-low of $3.35. Nonetheless, the MRO giant continued to be profitable and had paid out interim dividend of $0.04 per share in November 2016. The dividend payout was lower than last year’s $0.06 per share.

The Net Current Asset Value Per Share (NCAVPS) is calculated to be $0.55 per share while Net Asset Value (NAV) is at $1.33. This implies that SIAEC share price is currently inflated. Based on current trend, the share price is set to decline further and it is likely to reach the $2.50 level in 2017. My target entry-level for SIAEC remains at $2.20 per share.

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