Tuesday, October 05, 2010

SIA Engineering – Analysis of Purchase Part 3

Part 3 of this analysis of purchase will focus on SIAEC’s many joint ventures and strategic alliances, which are an integral part of the Group and which contribute significantly to its profits attributable to shareholders, as well as to its cash flows. These alliances have been forged over the last 10 years, with some even before the Group went for its listing in 2000. Looking back at SIAEC’s FY 2001’s Annual Report, Page 29 of Operations Review mentioned that expansion via such means benefits both customers and shareholders by virtue of its co-operative and cost-effective nature. In FY 2002’s Annual Report Chairman’s Statement, he mentions that alliances are central to SIAEC’s long-term growth strategy. In the 8 years after that statement, they are still staying true to that growth path and have delivered consistent and sustainably good results from these alliances.

Below is a table which features the gradual formation of JV and associated companies over the years, and I also have listed brief descriptions of the companies formed and their principle characteristics.

M&A Activity + JV (Chronological Sequence)

July 2000 > SIAEC acquired a 40% stake in Messier Services Asia Private Limited (MSA). MSA has a 10,000 square-metre workshop at Loyang and is the only independent facility in the Asia-Pacific region capable of overhauling Airbus 330/340 and Boeing 777 landing gears.

October 2000 > SIAEC signed a Memorandum of Understanding (MOU) to acquire a 30% stake in BFGoodrich Aerospace Aerostructures Group’s wholly owned subsidiary, Rohr Aero Services – Asia.

November 2000 > SIAEC formed a joint venture called Turbine Coating Services Private Limited with Pratt & Whitney and Singapore Technologies Aerospace Limited. The new company will repair and overhaul PW4000 turbine airfoils, which will enhance the respective joint venture partners’ current aero-engine repair capabilities in the Asia-Pacific region.

March 2001 > SIAEC signed a sale and purchase agreement with BFGoodrich Aerospace Aerostructures Group to acquire a 30% stake in Singapore-based Rohr Aero Services – Asia, a repair and overhaul facility for nacelles, pylons and thrust reversers for Airbus and Boeing aircraft.

February 2002 > Joint venture (IAT-Asia), a collaboration with Pratt & Whitney and Tube Processing Corporation. IAT-Asia will be the first in Asia to offer repair services for engine tubes, ducts and manifolds, enabling airlines in Asia to significantly reduce repair cost and turnaround time.

July 2002 > Signed a Memorandum of Understanding with PT JAS, a leading airport ground services operator in Indonesia, for a joint venture to provide aircraft line maintenance and technical ramp handling services at Indonesia’s major airports.

August 2003 > 17th Joint Venture (49% stake) with PT JAS Aero-Engineering Services, a strategic collaboration with PT Jasa Angkasa Semesta (PT JAS). PT JAS is a full-service airport handling company operating out of a wide network of airports in Indonesia, with more than 28 airline customers.

October 2003 > Understanding with Indian Airlines to form a joint venture in India. Services planned include airframe maintenance in Delhi, line maintenance at ten major Indian airports, as well as component overhaul and repair

FY 2004 > Signed a Memorandum of Understanding with Jamco America and Jamco Corporation for a joint venture to provide turnkey aircraft interior modifications.

July 2004 > Acquisition of a 45% equity shareholding in a joint venture with JAMCO Corporation and JAMCO America, Inc to provide turnkey solutions for aircraft interior modifications. The joint venture, JAMCO Aero Design & Engineering, will be one of the first in the region to offer airlines a one-stop service for cabin modifications, from conceptualisation to design and certification, right through to installation.

April 2005 > Joint venture agreement was signed with Cebu Pacific Air, in which SIA Engineering Company holds 51% in a unit that will offer line maintenance and light maintenance checks in the Philippines (at up to 14 airports).

April 2005 > Joint venture agreement with Parker Aerospace, a unit of the Parker Hannifin Corporation, a world leader in motion and control technologies, to develop a Centre of Excellence in Asia for Parker Aerospace hydro-mechanical components, which are used in aircraft hydraulic, flight control and landing gear systems. JV company is called Aerospace Component Engineering Services Pte Ltd in which SIAEC took a 51% stake. The company maintains, repairs and overhauls hydro-mechanical equipment for B747-400, B777, Airbus A320, A330 and A340 aircraft.

August 2007 > Acquired Aircraft Maintenance Services Australia (AMSA), a privately owned line maintenance company in Australia, which offers line maintenance services in Sydney, Brisbane, Coolangatta, Melbourne, Adelaide and Perth.

November 2007 > Established an MOU with Saigon Ground Services, a division of the Southern Airport Authorities, to form a line maintenance joint venture at Tan Son Nhat International Airport in Ho Chi Minh City, Vietnam.

June 2009 > Formed 49% joint venture with Sagem (a Safran Group subsidiary) to form an avionics maintenance, repair and overhaul (MRO) Joint Venture in Singapore. The JV will provide avionics maintenance, repair and overhaul services.

Jan 2010 > Set up Nexgen Network I and II to hold a 3% stake and 1% stake respectively in Pratt & Whitney’s C-Series and MRJ aircraft engine programs respectively.

The table above shows the joint venture companies by country. Interestingly, when SIAEC first got listed back in FY 2001, they only had joint ventures and alliances with China, Taiwan, Hong Kong and Ireland. In FY 2010, they have expanded this to many other territories such as Australia, Philippines, Indonesia, Bahrain as well as Vietnam (last two are not in the list as the deals are still being worked out in current financial year – see Part 5).

The above table shows the stakes which SIAEC Group has in each company, be it subsidiary, associated company or joint venture. It very clearly demonstrates that their list of companies has grown rather significantly over the last ten years, as they had started out with just 13 companies (as per the list, I have excluded a few wholly-owned “dormant” investment-holding companies); but as at FY 2010 they have a total of 24 joint ventures (my list contains 22 companies).

There was a stake increase in Singapore Jamco Pte Ltd in FY 2002 from 51% to 65% (note that all stake increases are highlighted in blue), Goodrich Aerostructures Service Centre Asia Pte Ltd from 30% to 40% in FY 2003 and Asian Surface Technologies from 29% to 39.2% in FY 2007. The result of these increases was that more of the share of profits flowed from associated companies (and more dividends as well); and as for the subsidiary company the revenue boost was also added into the consolidated income statement.

The table also shows clearly that new companies are being formed consistently over the course of 10 years, at an average of about one (1) per financial year (from 13 to 24 over ten years). This would demonstrate the slow but steady expansion path which SIAEC had taken and it is foreseeable that this would continue into the future as they are already investing in it right now (more on that in Prospects in Part 5).

Share of Profits and Dividends

The table above gives an interesting look at the contributions from associated companies and joint ventures over the last ten years. One would notice that share of profits had steadily increased from FY 2004 onwards, and was on an upward trajectory up till FY 2009 (at S$173 million); while FY 2010 registered a total share of profits of S$129.7 million due to the global financial crisis. Taking the 1Q FY 2011 share of profits of S$39.2 million, if we annualise it we will obtain a figure of roughly S$156.8 million (revenues accrue quite evenly over the years), which is a 20.8% increase over FY 2010. This should come on the heels of an expected global economic recovery; and also as air travel picks up and Changi Airport reports a surge in passenger traffic as recently as June 2010.

What’s interesting is that even though share of profits did not increase evenly and steadily over the years, if we glance at cash flows (i.e. dividends) we can see a very clear upward trend over the years. Dividends starts from zero in FY 2000 and increases steadily over the years to a record S$153.3 million in FY 2010, and did not seem to be affected by the dip in share of profits for FY 2010. Taking 1Q FY 2011’s dividends received (in cash flow statement) of S$50.8 million, if annualised this will give S$203.2 million, which is an improvement over FY 2010.

What I can conclude from this simple analysis is that cash flows have been increasing steadily and this forms the bulk of investing cash flows in the Group’s Cash Flow Statement, which implies that SIAEC’s ability to pay increasing dividends into the future is also a high probability.

Part 4 of this analysis shall focus on competitors of SIAEC, and I shall be looking at three companies in the same MRO space which compete with SIAEC and do simple analyses on them. Also, I will comment on the current global MRO industry and give my take on the future of the industry and how it will impact SIAEC.

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