In 2019, SIA Engineering paid an 11 cents dividends. If you’d bought shares today, and it paid a 2019 dividend today, that’s a 4.7% yield.
The company recently reported strong revenue growth, turned from losses to profits, shares slowly climbing up and it pays zero dividends.
Question — can SIA Engineering grow back to its 4.7% dividend yield?
Well, let’s find out.
SIA Engineering — Growing revenues and healthy profits
SIA Engineering is what I call the repair man of aircrafts.
It’s also an unusually nimble player in the aviation industry.
Unlike airline companies like SIA that is a highly capital-intensive business, SIA Engineering does a simpler job – it checks repairs these expensive airplanes that SIA owns, whenever there’s a stopover at Changi Airport.
This is what SIA Engineering calls “Line Maintenance”.
SIA Engineering operates in 27 other airports across seven countries, with six hangars in Singapore and three hangars in the Philippines.
In fact, as the pandemic recovered, SIA Engineering continued to secure new repair contracts – like the recently signed five-year agreement with Hawaiian Airlines for its A330-200 fleet.
It also secured a 10-year repair contract with Honeywell to service the 737, 787 engine components and another 10-year contract with Malaysia Airlines for their A320 fleet.
At a market cap of S$2.7 billion, I’d say this makes one of the most successful Maintenance, Repair and Overhaul, or MRO business.
In its latest third quarter results, SIA Engineering’s revenue grew 9% compared to the previous quarter. Its revenue was up 49% compared to the year before.
And net profits hit S$12.8 million, which was still down 61% from a year ago — the company lost its wage support from the government.
Put it this way, with aviation still at the cusp recovery, I think SIA Engineer’s profitable third quarter results still looked healthy.
Today, nine years after the peak, SIA Engineering shares still remain 54% below its price in 2014.
But what intrigued me was its shares had soared after the COVID pandemic — rising by 49% since October 2020.
SIA Engineering’s revenues grew from S$443 million in 2020, then S$566 million in 2021, and over the last 12 months – S$664 million.
I think it’s remarkable the company has turned from losses to profits.
However, what I like about SIA Engineering is it’s more than just recovering.
As a conservative investor, I like it maintains a healthy financial profile.
SIA Engineering’s “asset-light” business model allowed it to accumulate free cash flow, keeping plenty of cash on its balance sheet.
It also holds no debt, and doesn’t need to invest in heavy equipment or factories.
Thus, the company doesn’t get stuck paying high borrowing costs in this high interest rate environment. This explains its rising share price.
Is SIA Engineering more a “turnaround” stock trade?
But these numbers don’t tell the whole story.
While it improved revenues and profits, what I couldn’t help notice is SIA Engineering is not getting the profits it should get.
You see, while the number of flights have recovered to 63% of pre-COVID-19 levels, revenues have recovered to 65% of its pre-COVID-19 revenue in 2019, I don’t see that recovery in its profits.
Think about this.
Last time, SIA Engineering’s net profit margin’s average is around 20%. Today, it barely struggles to go beyond a 12% net profit margin. In my opinion, I think SIA Engineering should be a highly capital-efficient business.
I read its CFO said at an earnings briefing last year: “That for the mainboard-listed subsidiary of Singapore Airlines (SIA), it is ‘very difficult’ to tie its recovery directly to flight levels, because the current types of aircraft and maintenance involved might differ from pre-pandemic days.”
But I suspect SIA Engineering needs more time to “transition” into a profitable business.
In other words, SIA Engineering looks more and more like a turnaround trade – shares are stuck at the bottom, company reorganizes itself, wait for turnaround, shares go up.
However, such investing plays take a far longer time than expected. I would get tired of waiting much faster than holding on to the stock for good news.
An aggressive former monopoly
Here’s another thing.
SIA Engineering still faces strong competition. I wrote before, more and more airline companies are creating their “in-house” repair and maintenance capabilities.
On top of that SIA Engineering also competes against Hong Kong Aircraft Engineering and even our own ST Engineering for contracts.
At some point, you’ll know the repair and maintenance business transport isn’t a massive market.
I thought about what management said. I realized what was once an indomitable, high-growth, cash flow producing business is still facing a barrage of competition and shifting aviation trends.
I mean, what’s stopping from aircraft companies from seeking out other qualified MRO players, or even doing it themselves?
Before the pandemic, SIA Engineering’s average return on equity (ROE) is around 14%, which is way above many Singapore listed companies.
Today, SIA Engineering’s ROE is less than 5%, which really makes me think about the ability to produce good, steady future profits for shareholders.
Final Thoughts — Will SIA Engineering Pay a Dividend?
Before the pandemic, SIA Engineering paid at an average yearly dividend of 14 cents per share (between 2014 to 2019).
If it resumes dividends, at current share price, that’s an average 6% dividend yield.
In 2019, SIA Engineering paid 11 cents dividends, which is a 4.7% dividend yield.
Since 2019, that dividends was cut to zero.
I’ve said earlier, this is probably going to be a “turnaround” play. The kind I’ll have to monitor every quarter just to check how the business copes.
If there’s a sudden change of global macro event – like another pandemic, or a global crisis – I won’t be surprised if SIA Engineering would go right into the dumps: revenue falls, profits turn into losses and a cash burn in its balance sheet.
But I’m hopeful.
I think SIA Engineering can recover well, as travel picks up. And its share has already fallen so much I doubt the price could really get any worse from here.
I don’t expect a 4.7% yield anytime soon, but it could pay a small dividend to reward long time shareholders with its profits. In my opinion, it could start rewarding shareholders with a three or even four cents dividends from its profits. That should be about a 1.3% dividend yield.
According to SIA Engineering’s CEO, he pointed out “He was unable to say what metrics have to be achieved before the company would reward shareholders but added that if it is on track in its recovery trajectory, ‘I think we will definitely be looking at reviewing this again by the year end'”.
On a final note, I would say SIA Engineering has better redeeming qualities than its parent, and makes it a much better dividend play.
Put a gun at my head, I would rather put my money in SIA Engineering versus the other two aviation players, even though it could only pay a small dividend in the future.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan