I like businesses that produce rising earnings with little capital invested.
SIA Engineering (SGX:S59) was one of those excellent businesses.
Without their service, aircrafts would grind to a halt. SIA Engineering does one simple yet crucial job: it makes sure aircrafts are well fixed up before their next flight.
At S$2.7 billion market cap, SIA Engineering is a major Maintenance, Repair and Overhaul (MRO). It doesn’t need to invest in factories or heavy equipment to run the business.
Instead, it works with big aircraft engine makers — General Electrics, Pratt & Whitney and Rolls Royce to maintain and repair engines in Boeing and Airbus aircrafts.
I call this an “asset-light” business.
SIA Engineering produced, at one point, S$1.2 billion in revenues and S$270 million of earnings. The best part of this business is it only needs to sink in S$40 million of capital a year to produce a good profit.
SIA Engineering also produced an average 21% return on equity (ROE). ROE is a simple measure of how much profits a company makes for every dollar of shareholders’ capital. I call it a “capital-efficiency” metric.
I was lucky enough make some profits off owning SIA Engineering shares (Disclaimer — I don’t own the shares anymore).
But that was 10 years ago.
SIA Engineering — What Got You Here, Won’t Get You There
Last year, SIA Engineering produced far lower revenues of S$443 million and suffered S$11 million of losses. You might think it’s because of the COVID pandemic but that’s not true.
The signs were clear way before the pandemic even happened.
In fact, SIA Engineering’s revenues was stuck at S$1 billion over the past 10 years. It produced lower profits year after year. It was a struggling business.
According to the Chairman of SIA Engineering in 2019: “The MRO industry has been contending with heightened competition from traditional MRO service providers and OEMs. Challenges have been compounded by the longer maintenance intervals and lighter work content of new-generation aircraft, as well as shorter-term headwinds such as the unforeseen grounding of customers’ aircraft.”
SIA Engineering is a victim of its own industry. That’s because MRO business is facing tough competition.
You see, more and more airline companies are creating their own MRO capabilities. On top of that, SIA Engineering also compete against regional players like Hong Kong Aircraft Engineering (HAECO) and ST Engineering. The repair and maintenance busines for transport vehicles isn’t a huge market.
That’s why you don’t need to have too many players in the industry. Look at this and you’ll know.
Once a dividend dominator, in my opinion, SIA Engineering is a dividend dwindler.
Dividends per share fell from S$0.22 per share in 2013 to S$0.05 per share in 2021. That’s a 2% dividend yield. But that’s not all. Recently, SIA Engineering had to suspend all dividend payment because of not so good results.
It’s hard to believe SIA Engineering at this point can ever go back to its former glory.
The inescapable fact is the value of a business cannot over the grow faster than its profits over the long term.
If shares are a reflection of business value, you’ll know why SIA Engineering’s shares kept plunging year after year. The COVID pandemic is simply hitting the last few nails in SIA Engineering’s coffin.
Source: ShareInvestor Webpro, Dividend Titan
Is SIA Engineering a Buy?
Having said that, there’s some bright spot that remains.
SIA Engineering’s latest financial half-year report in September showed improving results. It produced higher revenues of $263 million, up 19% as compared to last year. It turned from losses of S$27 million to profits of S$25 million.
Global travel is picking up and management is optimistic about the business.
I think there could be a brief rebound in SIA Engineering’s shares because of its good results. But I’m not buying the shares — in the long run, this stock is not going to go anywhere soon. Why? Because its industry is just getting more and more competitive. And the numbers show.
Sometimes investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
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