Sunday, October 31, 2010

October 2010 Portfolio Summary and Review

October 2010 was another relatively quiet month in terms of corporate announcements and business news. Despite the constant trickle of economic news and data coming out of the USA and China, there was not much of an impact in terms of stock market movements and sentiment. It could be that people are either more de-sensitized to such news, or the full brunt of the news has yet to sink in. Whatever the case, companies which are well-managed should still be able to grow, albeit at slower rates dependent on economic growth. As for the issue of inflation, the current low interest-rate environment will probably cause this to be a problem 1-2 years down the road; and I am hoping this problem is tackled sooner rather than later.

The “biggest” and most sensational international news appears to be China’s unexpected increase in interest rates during late October 2010. China raised the 1-year lending rate and deposit rates by 25 basis points (0.25%), partly to slow down China’s (continual) red-hot growth and also to tame inflation. Let’s not forget that China’s property prices have also been on an uptrend, with prices moving out of reach of most commoners’ (as a proportion of their annual salaries). I personally feel that China could be where the next “bust” will occur, as it is never mentioned that this is a possibility and everyone is somehow looking towards the USA and Europe to drag down the rest of the world. There was even some news to suggest that all the inflows of “hot money” exiting USA and Europe could find its way into China, Hong Kong and Singapore, thereby creating an asset bubble in both property and equity markets. Whether this is so will only be much clearer, on hindsight!

Locally, the most sensational news happens to involved the Singapore Stock Exchange itself, as it launched a massive merger bid for the Australian Stock Exchange (“ASX”). SGX is using a combination of share issuance and debt to fund this proposed purchase; but already analysts are lambasting the move as being overly ambitious, and SGX claims to be able to raise EPS by 20%; though dividend per share will likely decrease as the outstanding shares issued will rise significantly. On Australia’s side, this deal faces significant hurdles as the Australian authorities are unlikely to be too happy with the prospect of Singapore owning a piece of ASX. As events unfold in the coming months, it will be interesting to see how things pan out.

The property scene in Singapore is somewhat strange – transactions have levelled off for private properties; but HDB resale transactions hit the highest level in at least 7 years. In terms of prices, there was not much downward movement despite the stringent measures implemented by the Government on August 30, 2010. So perhaps this lends some credence to the assertion that “hot money” continues to buoy asset prices and I feel it may create an artificial “cushion” for high prices and lead people to feel complacent that this is the “new norm” in property prices. As I have repeatedly emphasized, interest rates are currently extremely low (just look at SIBOR) and therefore this is a very unusual situation in Singapore. When the US sub-prime market imploded, many also had not expected it and were caught by surprise. I’d hate to see the same thing happen for Singapore, and hope that “things are indeed different”.

There was not much news in the way of personal finance and cars in the local news for October 2010; instead much of the news was dominated by something non-financial – the haze situation which blanketed Singapore in late October! I guess the outlook on the global economy must be as hazy as the skies above Singapore, for I do see a parallel there! Jokes aside, it is hoped that Indonesia can clean up its act (pun intended) and ensure no more cases of haze in Singapore and neighbouring Malaysia.

As November is coming up very soon, this will be an interesting month as five of my companies will be reporting results. They are SIAEC (Nov 2), MTQ (Nov 3, lunch break), Tat Hong (FY 2010), Boustead (also FY 2010) and Kingsmen Creatives (3Q 2010). Due to time constraints, I may not be analyzing all the companies here and posting my views on their results; either that or I may summarize the results into one post rather than split it into parts which makes it harder to read and track. Whatever the case, all I know is that I am going to be very busy in November! Hopefully, my mood will be lightened by the declaration of generous dividends from the companies in which I own shares in.

Below is a snapshot of my portfolio and associated comments for October 2010:-

1) Boustead Holdings Limited – On October 4, 2010, Boustead’s Energy-related engineering division was awarded S$9 million worth of contracts for the design, process engineering and construction of waste heat recovery units for onshore and offshore oil and gas installations in Brazil and Chile (i.e. South America). A more significant announcement was made on October 7, 2010 when Salcon clinched a multi-million dollar contract to design, engineer and construct a water treatment and return condensate plant for Tuas Power Ltd. The complex is slated to be completed in 2012 and builds on Salcon’s growing order book after its announcement in June 2010 of a S$21 million contract. With these two contracts in the bag, I foresee that Salcon should be able to turn in a second consecutive year of profitability for FY 2011, barring unforeseen circumstances.

2) Suntec REIT – Suntec REIT announced its 3Q 2010 results on October 25, 2010. A DPU of 2.503 cents per share was declared for 3Q 2010, down about 14% year on year. At the same time, Suntec REIT also announced the proposed acquisition of 1/3 of the new MBFC (Marina Bay Financial Centre), an iconic development which will be completed in 2013 and will be serviced by the Downtown MRT Line. Although financing details have not been released, it will probably be a combination of shares and more debt, which means a rights issue is likely on the cards. When that occurs, I will have to evaluate my position to review if I wish to finance this ambitious purchase, or if I wish to divest my holdings.

3) Tat Hong Holdings Limited – There was no news from Tat Hong for October 2010. Tat Hong’s 1H FY 2011 results should be released some time close to mid-Nov 2010.

4) MTQ Corporation Limited – There was no news from MTQ for October 2010. The Company will release their 1H FY 2011 results on November 3, 2010 during the lunch time trading break.

5) GRP Limited – There was no news from GRP for the month of October 2010. The AGM was held on October 29, 2010 (which I was not able to attend).

6) Kingsmen Creatives Holdings Limited – There was no news from the Company for October 2010. As the Group General Manager Mr. Andrew did mention that Kingsmen will not be announcing ad-hoc contracts anymore, I guess investors have to wait till each quarter’s results are announced to find out about the new contracts garnered and latest order book.

7) SIA Engineering Company Limited – On October 4, 2010, SIAEC announced that they had signed an A340 contract with Airbus to provide maintenance, repair and overhaul (MRO) services for Singapore Airlines’ fleet of five Airbus A340-500 aircraft. The value of the contract was not mentioned but it would last for six (6) years.

Portfolio Review – October 2010

Realized gains have continued to remain constant at S$46.4K as there was no transaction for the month and also no companies going ex-dividend. For the month of October 2010, the portfolio has gained +0.68% against a +1.5% rise in the STI. On an annualized basis, the portfolio has gained by +19.1% against the absolute gain of +8.5% for the STI. Cost of investment remains at S$202.4K, and unrealized gains stand at +25.2% (portfolio market value of S$253.3K).

November 2010 will be a very interesting month indeed as five out of my seven companies are slated to release results. It will be a busy time for me as I review their financials as well as business plans!

My next portfolio review will be on November 30, 2010 (Tuesday).

Wednesday, October 27, 2010

Ezra – Review and Analysis of FY 2010 Financials and Comments on Proposed Acquisitions

Ezra released their FY 2010 financials on October 22, 2010; and at the same time, there was also an announcement on the acquisition of two companies for a combined US$325 million (US$250 million + US$75 million). The details can be read up on SGXNet, so I will NOT be posting the salient aspects of the proposed acquisition. Although I had divested of Ezra one year ago in October 2009, I am still monitoring its business, financials and fundamentals by way of interest to assess if the divestment at the time was a correct choice, based on objective evidence and my thoughts at the time. That post one year ago can be found here.

While reviewing and analyzing the numbers from the financial statements, I had a distinctive feeling that the Balance Sheet quality had deteriorated significantly from a year ago, and the Income Statement also showed a similar but gradual deterioration. What I found out from my analysis is strictly based on an objective look at the hard numbers for Ezra as at August 31, 2010; and all conclusions are my own personal one. At no time at all should any reader construe this information as a recommendation to either buy or sell securities of Ezra Holdings Limited, and I shall NOT be responsible for any losses derived thereafter. Notwithstanding the upbeat press release by Ezra (drafted by Oaktree Advisers), I would like to give my objective view on some of the key numbers and financials from an analytical standpoint. Comments are encouraged and welcome in order for me to learn and grow as an investor.

At the same time, I also provide my comments on the proposed corporate financing deal which Ezra had proposed for Aker Marine Contractors (“Aker”) and AMC. I explain why the deal may not be as lucrative as reported in the glossy press releases and presentation slides, and present my view on the potential long-term effects of such an acquisition on the financial health of the Company. The usual disclaimers apply with regards to my comments here, as well.

Comments on FY 2010 Financial Statements

1) Gross Margins are shrinking
– Gross margins for FY 2009 were 30.7%, while gross margins for FY 2010 fell to 29.4%. However, this does not show up the fact that gross margins had fallen across two out of three of Ezra’s business segments, as illustrated under section 8 of the financial statement release. Offshore support services’ gross margin fell from 38% to 35%, while deepwater subsea services’ gross margin fell significantly from 13% to a mere 3%. Fortunately for Ezra, deepwater subsea only took up 6% of FY 2010’s revenue, as compared to 14% for FY 2009; otherwise the impact to overall gross margins would have been more striking. Realistically speaking, with a gross margin of just 3%, it is unlikely that the division has any net profit to speak of, as I am pretty sure that admin and other expenses relating to the division exceed 3% of revenues.

2) Admin and Finance Expenses are rising faster than revenues – This can be clearly seen as revenues year on year grew just 7% while administrative expenses increased by 54%. As a % of revenues, admin expenses now takes up 14% for FY 2010 versus 9.7% for FY 2009. Assuming more shrinkage in gross margins, this trend is very likely to further corrode net margins. Another aspect worth highlighting is finance expenses, which had risen 387% in 4Q FY 2010 to US$8.2 million from US$1.7 million due to the very significant increase in debt which the Group had taken on (more on this later). This made FY 2010 financial expenses 81% higher than FY 2009, and remember the increase is mainly made up of just the 4Q FY 2010 increase; if we annualize the increase based on 4Q FY 2010 expenses alone, then the full year impact for FY 2011 is likely to be fairly significant. For information, financial expenses made up 4.5% of revenues for FY 2010, and 2.7% for FY 2009.

3) Share of profits from associated companies and joint ventures is either stagnant, or decreasing – A quick glance will show that share of profits from associated companies was flat year on year with a decrease of 4%, while the share of profit from joint venture was down a significant 86% from US$9.4 million to just US$1.3 million. These two items also impact the Income Statement as the combined effects of higher admin and finance expenses, coupled with lower gross margins, all serve to lower net margins significantly. However, note that all this is not readily apparent as tax expenses had, for some reason, fallen by 66% (it is not known if this is one-off); so the net impact is a 9% rise in net profit attributable to shareholders of US$76 million for FY 2010.

4) Trade Receivables keeps rising – One very noticeable aspect of Ezra’s Balance Sheet which represents a red flag are their receivables, which continues to rise unabated over the quarters. A simple comparison is provided below:-

Trade Receivables AmountFY 2009 – US$182.7 million
1Q FY 2010 – US$164.5 million
2Q FY 2010 – US$156.8 million
3Q FY 2010 – US$217.3 million
FY 2010 – US$205.7 million

If we just use a year on year comparison, trade receivables has risen by 12.6%, while revenue has only risen by 7%. This persistent rise in receivables is worrying, and note that receivables make up 58% of FY 2010 revenues.

5) Rise in current liabilities versus current assets – This is a question of asset quality and liquidity (as well as recoverability). The rise in current assets from US$400 million to US$515.7 million was mainly due to the rise in receivables as mentioned, a rise in inventories, and a significant rise in “other current assets”. Other current assets comprise progress payments and prepayments made to equipment suppliers and for vessel mobilization, and as to whether these are recoverable or are to be expensed off is not known (my guess is most likely to be expensed off in future periods). Current liabilities, meanwhile, increased from US$239.3 million to US$366.5 million, and consists mainly of an increase in debt and notes payables, which I shall elaborate on in the next point.

6) Debt is increasing at an alarming rate – When I first divested Ezra back during October 2009, it was before the Group issued its Convertible Bonds, and way before its recent rights issue to raise S$155 million. I shall extract out the debt portions from its Balance Sheet (see below) and do a simple comparison, to show the effects.

As can be observed in the above, the total debt has risen by 111% from US$309 million a year ago, to US$653.7 million as of FY 2010. Debt equity ratio has climbed from 0.6 to 1.1, and this is before taking on additional debt for the acquisitions (to be discussed later). I did a comparison with Ezra’s cash equivalents and found that net debt increased by 216%.

7) No Free Cash Flow Generation – In the press release, it was mentioned that there was positive operating cash inflows of US$50.4 million for FY 2010, against an operating cash outflow of US$26.2 million for FY 2009. However, the important metric which should be considered is Free Cash Flow, which is cash flow from operations minus capital expenditures. If this is computed, then FCF is negative US$244.9 million for FY 2010, and negative US$202.9 million for FY 2009; so FCF actually decreased by 20.7% over a one year period. Looking at it from this point of view, it is readily apparent that there is woefully insufficient cash generated from operations to sustain Ezra’s expansion plans, which is why they are tapping a lot on financing cash flows; using bank loans, convertible bonds and issuing shares.

8) Payment of a dividend – This is totally inexplicable to me, as Ezra had declared a final dividend of 1.5 cents/share due to “strong operating cash flows”. Considering the company is planning a major acquisition as part of its “next lap of growth”, and needs as much cash as it can afford, why is it paying out the cash to shareholders? Instead of retaining cash for expansion, Ezra chooses to issue shares (dilutive) and take on more debt through convertible bonds.

Comments on Proposed Acquisitions

In the presentation slides for the acquisition as well as the press release, much of the story which is being touted is one in which Ezra will be propelled onto the global stage to be “up there” competing with the major players in the global oil and gas subsea industry. While I acknowledge that this is indeed “transformational” for the Group, an astute shareholder or potential investor has to ask whether the terms of the acquisition and the potential financial effects make sense in the long-term, based on facts available at present. Would the costs outweigh the potential benefits, and will the synergies of the deal be enough to offset the poor gross margins which are inherent in the subsea segment? This segment of my analysis shall attempt to answer these questions, and provide some clarity with regards to the proposed financing deal.

1) Payment Consideration with respect to book value of assets – On Page 1 of the proposed acquisitions document (NOT the press release), it is stated that Ezra will acquire 100% of AMC for US$250 million, and 50% of ACAS for US$75 million. A quick check on Page 2 shows that the book value of AMC is only US$49 million, which implies that Ezra is paying a very hefty 5x of book value for AMC. Since ACAS is a SPV, there are no indicative figures given as to its NBV, except to mention that it is going to construct a vessel worth about US$300 million. If I take the example of SIAEC which is trading at 3x+ book value and has a business model which generates very healthy FCF and ROE of >20% on average for 10 years; then why should Ezra pay 5x book value for a subsidiary of a listed company on Oslo Bors? One should question if the purchase price is considered “reasonable” in light of comparison of business models.

2) Economies of scale, synergies and alignment of corporate cultures – The qualitative aspects of the acquisition were not spelt out in detail, and the presentation slides mostly dealt with the “macro” aspects such as the creation of a much stronger company with assets in excess of US$1 billion. However, one must consider if there are economies of scale between Ezra and AMC; how much of the synergies will flow through to the bottom-line (which is, after all, the point of this whole exercise), and whether there is alignment in corporate cultures between both companies. These should be asked of Management and communicated explicitly to shareholders for avoidance of doubt.

3) Boost to gross margin – Ezra is not too clear on how the acquisition will boost gross margins of subsea, which for FY 2010 was reported as being a measly 3%. In an article published in the Business Times on October 23, 2010, Mr. Tay Chin Kwang (Finance Director of Ezra Group) mentions that “obviously, we are not investing to get this kind of margin. Over time, you will see the margin picking up”. Also, in Ezra’s FY 2010 presentation slides, Slide number 5 mentions that “subsea margins to improve with new markets and additional assets and services”. So far, these are all assertions which do not give much assurance to the investor, as no commitment is made on exactly how much gross margins will improve by. If we compare offshore and marine segments, gross margins have always been healthy and hovered at around 35% and 25% respectively. However, gross margins for subsea have traditionally been much lower (13% for FY 2009, 3% for FY 2010), and there has no far been no indication that gross margins can be higher than 13% (which is historical). Slide 16 of the presentation slides (Part 2) for the acquisition clearly show that Ezra’s proforma projected revenue contribution from subsea is expected to grow to 40% of total revenue, up from 6% currently. If gross margins cannot be significantly raised, this could result in Ezra’s overall blended gross margins to suffer in the coming quarters.

4) Improvement in collectability of debts – With the acquisition of AMC, Ezra is supposed to have a larger base of customers (according to the slide), of which a large chunk are global multi-national players with very good track records and operating histories. Will this mean that collection of debts will improve? Thus far, as mentioned, receivables has been increasing at a somewhat alarming rate, considering revenues have not shown proportionate growth.

5) Financing Structure for the Acquisition – The financing deal which Ezra has proposed consists of 3 sections – the first is payment by way of shares to AKSO (the seller, of 72.5 million shares, or 9.2% of current issued share capital), thereby making them a substantial shareholder of Ezra. The price of the shares to be issued is not mentioned, but presumably it is to satisfy the US$150 million portion of the deal, out of US$250 million. Next is the 3-year convertible bond issue of US$50 million (conversion price of S$1.7959 per share), paying a coupon rate of 5% per annum; and finally a US$50 million payment in cash to the sellers. Collectively, this deal will cause dilution in EPS and dividends for existing shareholders by 13.8% (assuming all CB are converted into shares), thereby reducing EPS from US 11.56 cents to US 7.06 cents). Also, debt will increase by a further US$50 million on the Balance Sheet and interest expenses will go up by another US$2.5 million per year. Ezra is paying a very high interest rate of 5% considering global interest rates are at multi-year lows; hence I was puzzled as to why they did not get a bank loan to finance the debt portion of this deal, as even companies like MTQ can get a line of credit from UOB at very attractive interest rates. The final payment of US$50 million is about 26% of the current cash balance for Ezra and will further drain cash from the Balance Sheet; and this is not even taking into account the payment of US$25 million at the second close for the 50% stake in ACAS.

So to summarize, the deal throws up a lot more questions than answers, and there are many aspects which should be scrutinized more closely, such as the payment of such a high premium to book value for AMC, the current low gross margin for the subsea segment; and also the financing deal which will be dilutive to existing shareholders and which will cause Ezra’s Balance Sheet and Income Statement to weaken further.

My advice to shareholders and interested investors (of which I am NOT one) is to go to the EGM convened to approve this deal and ask many questions. And at the upcoming AGM to be held in December 2010, ask all you can about the FY 2010 financials as I have highlighted above. The red flags highlighted are serious and may have significant long-term effects on the Group if not addressed. I shall end my analysis here and will continue to monitor the Group’s financials over the next few quarters.

Saturday, October 23, 2010

SIA Engineering – Analysis of Purchase Part 4

For Part 4 of this Analysis of Purchase, I move on to competitive analysis by comparing SIAEC to competitors within the same MRO industry. One is from Singapore (ST Aerospace, a division of ST Engineering Limited, listed on the Stock Exchange of Singapore), another is from Hong Kong (Hong Kong Aircraft Engineering Company or HAECO, listed on HKSE); and the last one is from Canada (Vector Aerospace Corporation, listed on Toronto Stock Exchange). I will not be doing an analysis which is as comprehensive as the one I am doing for SIAEC, and will merely be focusing on the financial aspects and comparing them to SIAEC; as well as offering comments on the Balance Sheets and Cash Flows, where applicable.

Hong Kong Aircraft Engineering Company (HAECO)

HAECO is a subsidiary of Swire Pacific Group of companies and has provided comprehensive aeronautical engineering and maintenance services to airlines and operators since 1950. Its website is at and gives a good introduction of the company’s business activities. They basically also do heavy maintenance, technical inspections and line maintenance for their customers and their activities are very similar to SIAEC. Their financial year-end is December 31.

It is fairly interesting to note that for HAECO, their revenue base has grown quite considerably over the years as compared to SIAEC, mainly due to the different nature of expansion for the two companies. For SIAEC, as mentioned, they go through JV and M&A and so their revenue base from consolidation does not increase so much. For HAECO, their average 10-year operating margin is 13.7%, quite comparable with SIAEC’s operating margin of 13.9%. Average ten-year net profit margin for HAECO is 20.2% against 23.1% for SIAEC, which shows that SIAEC has a slightly better net profit margin as compared to HAECO. Even in terms of current ratio, SIAEC has a higher average of 2.49 compared with HAECO’s average of 1.89; and this is because HAECO’s current ratio has deteriorated somewhat from FY 2006 to FY 2009 to below 2.0 (before FY 2006 it was consistently above 2.0). Average 10-year ROE for HAECO was also lower as compared to SIAEC’s 10-year average, at 16.9% against 22.5%. In addition, it seems HAECO started taking on a little more debt towards FY 2008-FY 2009 period, as debt had hit HK$1.126 billion for FY 2009 and the Group had a debt:equity ratio of 0.22. SIAEC, on the other hand, remained debt-free during all ten years in the analysis.

Looking at HAECO’s cash flows (only 8 years were used as FY 2001’s Annual Report was not available for download on the Company’s website), it can be seen that there was also FCF generated every financial year, similar to SIAEC. However, unlike SIAEC, investing cash flows have been mostly negative (for the last 5 years out of the 8 years under review); and capex is also pretty high as a % of revenues as it more recently (in the last 5 years) averaged about 17.6%. On the other hand, SIAEC’s capex averaged just 5% of revenues for the ten years under review, which demonstrates the robustness of SIAEC’s strategy of using alliances and joint ventures to reduce capex commitments for the Group. Notice too that HAECO paid out a special dividend in FY 2002 and FY 2003 (when investing cash flows were positive); and just once more in FY 2006.

Singapore Technologies Aerospace (ST Aerospace)

ST Aerospace is the MRO arm of ST Engineering, a Singapore-listed conglomerate which has many diverse divisions dealing with electronics, land systems and marine facilities. The division is one of the largest third-party, independent aviation repair and overhaul (MRO) companies in the world. Our global customer base includes many of the world's advanced air forces, leading airlines and air freight operators. ST Aerospace provides defence and commercial customers a total aviation support system, having extensive capabilities in engineering and development, life cycle maintenance, materials and component supplies, refurbishment, customised modifications and upgrades. Website and information can be found at The information below was compiled from ST Engineering’s Annual Reports from FY 2000 through to FY 2009.

Interestingly, a quick comparison of SIAEC with ST Aerospace (STAE) shows that STAE actually has higher revenues than SIAEC, at S$1.875 billion versus SIAEC’s FY 2010 revenue of S$1 billion. STAE’s revenues had also roughly doubled in the last ten years since FY 2000, while for SIAEC its revenues had increased by merely 52% from FY 2001 through to FY 2010. In fact, operating margin for STAE was also better than SIAEC, at 16.5% on average compared to SIAEC’s average of 13.9%. Considering STAE is just one division of ST Engineering, such results are very impressive indeed as they indicate the division is very well-managed; but the problem is in seeing the “big picture” of the aerospace division being just one of four divisions at ST Engineering (i.e. you could not buy shares of STAE by itself; even if it was evaluated to be a much better business than SIAEC). But more on that later……

The positives for STAE continue on with very high ROE of 47.4% on average! This is because it has a pretty low equity base, but it makes me wonder if this is because STAE is only a division of ST Engineering and so its equity may be consolidated into the Group’s books; hence I am not sure how much reliance I can place on this super-high ROE. But on the surface, it certainly looks attractive, and from an Income Statement standpoint STAE’s financials look more impressive than SIAEC.

From a Balance Sheet standpoint, however, the story is a little different. Looking at current assets versus current liabilities, STAE had some years where they had negative working capital and current ratio of less than one. As a result, its average current ratio was just 1.13 over ten years; against 2.49 for SIAEC (which has never had a year of negative working capital). Looking at debt, it seems STAE’s debt had steadily increased over the years, starting from just S$19 million in FY 2000 to S$360 million as at FY 2009; for a debt to equity ratio of 0.87 as at December 31, 2009. STAE was also in net debt for FY 2008 and FY 2009, as loans exceeded cash and bank balances. SIAEC, on the other hand, maintained zero gearing and always had excess cash in the bank; so in terms of Balance Sheet strength I would conclude SIAEC is stronger on this aspect.

As we turn to cash flows, STAE shows good operating cash inflows and there is also FCF generated every year except for FY 2008. Capex spending as a proportion of revenues was also low at 5.6%, comparable to SIAEC’s 5.0%. Of course, net investing cash flows for STAE are not as strong as SIAEC, but this is due to the nature of SIAEC’s business of having associated companies and joint ventures, which from STAE’s books are not very significant. Still, to be fair and objective, STAE does have robust cash flows which are in every way comparable to SIAEC’s.

So in conclusion, I would say STAE would make a pretty good investment itself; assuming one could determine the dividend flows (they are not separately “tagged” to STAE and are declared on a group basis from ST Engineering) and if STAE traded separately under its own counter name. But the gearing issue does bother me and I would be wary of the business as it sometimes has negative working capital and also carries net debt.

Vector Aerospace Corporation

Vector Aerospace Corporation (“Vector”) is a Canadian Company founded in 1998 and is a global provider of aviation maintenance, repair and overhaul services for fixed and rotary-wing aircraft. Vector provides services to commercial and military customers for various types of gas turbine engines, helicopter dynamic components and helicopter airframes. It has customers spanning Canada, North America, Europe and Africa. It is listed on the Toronto Stock Exchange under the stock symbol “RNO”. Its website is located at All numbers and information were obtained from Vector’s Annual Reports from 2000 through to 2009.

Looking at Vector’s 10-year financials, it seems that the Company had a chequered past during the 2001-2003 period as it suffered from operating and net losses; and it was only after FY 2005 that the business began to pick up and profits were more consistent. The few years of losses seem to coincide with the bear market of 2000 to 2002, and could be the reason for this under-performance. Operating margins are not high either, at an average of just 8.5% over eight years (excluding negative margins); while net profit margin was just 4.4% over 7 years.

Working capital was healthier than that of STAE, as every year registered positive working capital and ten-year average current ratio was 1.54 (STAE had an average of 1.13; SIAEC’s was 2.49). However, debt was quite a significant portion of Vector’s Balance Sheet, though this was gradually being reduced all the way till FY 2010. Debt:Equity ratio peaked at 2.46 in FY 2003 and gradually decreased till 0.30 in FY 2009, but the fact remains that debt is a very persistent aspect of Vector’s Balance Sheet, and even though they generate decent FCF, they still have reliance on debt to grow the business. ROE was full of ups and downs, dipping to negative 10.6% during the worst year (FY 2001) to as high as 17.5% in FY 2008; but never in any one year did it exceed 20%. Average ROE for all 7-years (in which there was +ve ROE) was just 13.2%; and when all ten years were taken into account the average ROE was a mere 0.5%! This is in contrast to SIAEC’s much more consistent ROE over the years; averaging 22.5% over ten years.

In terms of cash flows, something which struck me as being very strange was how cash at bank always squared off to zero at the end of each financial year from FY 2000 through to FY 2007; as bank loans raised, government grants obtained and funds raised always cancelled out the spending and cash outflows. Perhaps there is some law I am unaware of, or something about Vector which enables it to rely on some grant income or subsidies for X number of years. Thus, in this case, cash flows for Vector are not very comparable, except for the capex section. Spending on capex as a proportion of revenues was very low for Vector, in fact even lower than SIAEC on average, but note that there was negative FCF for three out of ten financial years.

To conclude, Vector’s case is somewhat not directly comparable to SIAEC due to the nature of cash flow statement as mentioned above, and also because of very different tax laws and possibly accounting systems for Canada versus Singapore. Still, it acts as a good competitive comparison.

Competitive Analysis Summary

The three competitors chosen in this section represent some of the dominant players in the MRO industry; and though some of them have features which are stronger than SIAEC; I would think that as a package, SIAEC boasts the most consistent (and growing) profitability, is unleveraged and has very strong FCF.

Valuations are admittedly not cheap for SIAEC (about 15x historical currently, close to its 5-year average PER valuation), and is about 13.9x ex-cash of 53 cents/share. However, I do believe in buying a good company at a fair price, rather than a mediocre company at a good price. I am also willing to count on the continuity of the dividend yield to act as a cushion against long-term capital loss should the business show signs of permanent deterioration.

In the last and final Part 5 of this Analysis of Purchase, I shall touch on the Global MRO industry outlook (and comment a little on the Middle East too), as well as talk about SIAEC’s prospects (based on FY 2010’s Annual Report), do a pros and cons analysis; and conclude.

Tuesday, October 19, 2010

The Value of Investment Forums

When the topic of investment forums comes up, I guess most investors will immediately shake their heads and recoil in horror, because most of what’s being spoken and commented on in public forums is basically noise. While I cannot deny this, one must understand that the value of good information is usually dependent on the person giving it, and whether he has any hidden agenda(s). It also follows, therefore, that truly good and valuable advice must come at a price – meaning you have to pay money for information which you are likely to act upon. Most people in their right mind would not act upon information being copied/pasted or mentioned in a public forum, as most of these statements/quotes may be unsubstantiated and are little better than rumours and hearsay.

So can any real value be extracted out of investment forums, or can we just unilaterally classify them as just another source of “noise”, akin to your neighbor or the taxi driver giving out stock tips? As with all things, one must analyze the quality of the forum, its content as well as the intentions and experience of its members. My intention in this post is to review several of the more popular investment forums and make general comments on the quality of the forums with regards to gathering useful information to make informed decisions. As readers, you may or may not agree with these classifications, but I welcome you to please articulate your views in the comments box so that everyone can have a healthy, lively and constructive sharing session.

One of the more popular investment forums is a paid forum hosted by Shareinvestor, and Shareinvestor also consists of other useful features for both investors and traders with its fundamentals fact sheet and charting software respectively. I was a subscriber to Shareinvestor from 2007 through 2009, and the forum did have some very wise folk giving very pertinent insights into business activities and prospects. Best of all was “Oldman” or Dr. Michael Leong who is the founder of Shareinvestor, and he would occasionally pop up to share insights into his investment criteria and the companies he owns. He has several large positions in a few locally-listed companies (I will not elaborate on which ones), and tracks their business closely. I personally had benefitted a great deal from insightful comments posted on Shareinvestor’s forum back then, and also absorbed a lot of timeless investment principles from the experienced veterans. However, as markets have recovered somewhat since late 2009, the forum has also been filled with more incessant chatter involving speculation, tips and hearsay. However, if one digs deep, there are still some veterans who are very savvy investors and who will share their knowledge without hesitation, and without any hidden agendas. My rating for this forum is about 6 out of 10.

The next most “popular” forum has to be Channel Newsasia’s market talk forum (“CNA”). CNA is a place where everyone and anyone can post a new thread, and moderation is close to non-existent except for the filtering out of swear words and the like. This forum is literally littered with rumours, tips and half-truths; and almost anyone can say anything they like without much support or evidence; which means it is a forum lacking in substance and depth. I dare say that there is only the occasional forum post which has substance and depth, but it is probably less than 0.01% of all the posts there, most of which constitute incessant noise. The rating for this forum is a low 2 out of 10.

The next forum is that of Invest Ideas, and I must say this forum is of much higher quality in terms of the breadth of articles posted, as well as opinions given by the forum members. There are threads which range from technical analysis to fundamental analysis, as well as economic news and alternative investments such as gold, silver and land banking; all the way to properties. In addition, there are also threads which discuss other non-finance/investment related topics such as parenthood, movies and other interests. Moderation is tight and the moderator is very active in ensuring the forum abides by rules and regulations; and this ensures proper “behavior” by the members and facilitates responsible posting. My opinion is that one can get a ton of information (segregated by topics) on this forum, on almost any discernible financial topic; as well as discussions on listed companies listed on SGX, NYSE and even HKSE. One main gripe I have is that most of the articles are copied/pasted, and the members’ contribution to individual threads is too little in general; another complaint from me is that there are simply too many threads and it can get quite voluminous and daunting for one to keep up with the influx of information, which results in information overload. But overall, I would still give 8 points out of 10 for content and presentation of ideas.

The final forum which I would like to highlight is that of Value Buddies. Though it would appear to be a relatively new forum, it is actually a continuation of the former Wallstraits forum set up by Curtis Montgomery, a famed value investor. Wallstraits started out in 2003 and continued till about 2009, where it was shut down due to neglect and then later “re-founded” as Afralug. Afralug itself went out of commission recently, and the current Admin started Value Buddies in the spirit of continuing the discussions on value investing. For value investment aficionados, this forum will offer a platform for serious discussion on companies and their businesses. Other topics covered also include personal finance, property and alternative investments, which have separate sub-forums. Posting on this forum is strictly limited to members only (which is FOC) but anyone can visit to view all threads. Content and presentation wise, I would also rate is as an 8 out of 10.

So after all has been said and done, can one extract value out of these aforementioned forums? It really depends on your focus, time horizon and how much trust and importance you place on specific forumers postings. Ultimately, my advice would be to take everything with a dose of salt and go research it yourself. There’s nothing like good old independent thinking to come up with some really brilliant ideas. Of course, forums may be the “seeding grounds” for such ideas, but one has to work hard to delve into it on his own. After all, good and useful information NEVER comes free!

Disclaimer: All opinions expressed in this post about forum content and quality are of a purely personal nature, and not intended to either encourage or discourage the general public and readers from visiting these forums. Readers are advised to make their own independent assessment and decisions on these forums and not to rely on this blog post for advice or construe my statements as recommendations to visit or avoid said forums.

Friday, October 15, 2010

The Importance of Integrity

Recent events in the global arena as well as back home have highlighted how important it is to have integrity in business dealings. Integrity forms the backbone of all our dealings with fellow human beings, and even more so in the arena of business, where trust is of utmost importance to sealing deals and concluding contracts. One major aspect of life where trust and integrity are of paramount importance is in dealing with others who have entrusted their monies with you, and within the business circle and investing arena this refers to shareholders and bond-holders who park their money into companies; and who expect these companies to be run by Management who are competent, diligent and most importantly above-board.

I guess everyone would have heard of the name Bernie Madoff by now, the man who perpetuated a Ponzi scam so huge that it dwarfs all other scams undertaken by con men in history. The problem, in his case, was that greed and the lust for more and more money kept the “machine” going, and once the fraud was perpetuated on such a grand scale, one would find it impossible to just “pull the plug”. Like the proverbial house of cards, just removing one of the pillars of foundation for this scam would cause the entire scheme to collapse, which was why Madoff was “forced” to concoct lie after lie to cover up a scam which grew increasingly out of proportion. Integrity, sadly, was the driving force which misled so many investors to invest in him, as he had supposedly built up a reputation of being honest, clean and upfront. Later reports would, however, paint him as a secretive man who refused to divulge how he managed to obtain his consistently stellar “returns” through both good and bad times. The rest, as they say, is history.

A little closer to home, we have the most recent massive fraud case of Sunshine Empire. The story has probably been told and re-told umpteen times, but it is worth mentioning that James Phang, the mastermind, exuded such an aura of invincibility that most people felt awed and rushed to “invest” their monies with him; not knowing that underneath the veneer of smiles was a crooked and twisted mine devoid of empathy and integrity. The strange thing about all this is that James had previously been involved in very shady, seedy and suspicious business ventures such as Number One Product (NOP) which painted him out to be less than an honourable person; yet somehow no one picked up on the integrity issue (or perhaps no one cared?) and avoided him like the plague he is. I guess he will be spending a lot of time polishing up his teeth to flash his trademark toothy grin repeatedly in prison for all the inmates to admire….

The above two examples illustrate, in a very simple manner, the headaches which occur if people put their trust in the wrong person. So how does this relate back to investing? A CEO or MD must have the integrity to admit the flaws within his company and mistakes made; and these should be communicated with unbridled candor. One way to assess if a CEO is honest is to see if he actually delivers on promises or sweeps them under the carpet once things turn back. To me, deliberately hiding the bad stuff and only promoting the good stuff smacks of dishonesty, and is tantamount to misleading the investors and shareholders! I will not name companies and people, but suffice to say I have seen such cases in the Singapore listed companies’ scene over the last few years where one thing was said but another thing was done. This, of course, has a lot to do with corporate strategy and one may argue (on the side of the CEO) that he would be unable to foresee how bad things would get (during the sub-prime crisis) or how much things would change as a result of political, social and economic factors.

However, my belief is that a good and honest CEO and top Management should prepare and pre-empt shareholders and investors for trouble on the horizon, and not continue to paint an overly rosy picture of the company’s prospects. Integrity would be lacking if all the CEO does is go on promotional road shows, attend briefings to sell his company and laud the successes while playing down the risks – all this in the name of possibly raising funds from the secondary market and boosting the share price. There are too many glamorous CEOs out there who shamelessly promote their company in the mainstream media, all the while knowing the true state of affairs but hiding it better than one of those cloaking devices in the Star Trek franchise. One could put forth a convincing argument that this is how companies sell shares to the unsuspecting fund managers and general public – by promoting the “promotable” and selling all the “saleable” aspects. Ultimately, it is still caveat emptor.

A CEO with true integrity should not set about misleading the public, as he may also be subconsciously misleading himself and his executives! Some examples of CEOs whom I will label as “having integrity” are those who are honest and come clean with their companies’ problems and risks, and down play the attractiveness of their business. They should present factual and realistic scenarios instead of “souped-up” presentations, and should also take questions in an open, transparent and frank manner. In this way, he can earn the trust and respect of his shareholders and also Board of Directors. So the next time you attend AGM to speak to the CEO, or read about some CEO in the news, remember these pointers and judge the person accordingly before you put money in his company.

So I shall leave you with a famous Warren Buffett quote: “In looking for someone to hire, you look for three qualities: integrity, intelligence and energy. But the most important is integrity, because if they don’t have that, the other two qualities, intelligence and energy, are going to kill you.”

Sunday, October 10, 2010

Personal Finance Part 19 – The Smart Phone Phenomenon

This post probably qualifies as something of a rant; then again it may also be perceived as a small lone voice crying out (somewhat vociferously) against the rampant materialism and consumerism which seems to be rapidly pervading our lives and society. I guess those of you who saw the title probably could guess the gist of my post, but I would like to emphasize that I do NOT have anything personally against smart phones or people who own smart phones. This is more of an illustration on how one can continue to live (more) simply and cut down on aspects of their lives which do not necessarily need to be made more complicated (by technology, no doubt). Call it “The Simple Dollar” of Singapore, as USA has seen many blogs and websites springing up which espouses simple living and cutting down on material items and technology.

I guess I should first begin with a brief introduction – what is a smart phone, and how it is superior compared to a plain vanilla mobile phone? Granted, I am NOT in the IT line and I cannot give a strict technical definition of a smart phone; so I am just going to go with the layman’s definition – a smart phone is one which has a multitude of functions including, but not limited to, surfing the internet, checking emails, taking high-resolution photographs, playing mp3 and radio and online games. “Normal” mobile phones can just do the basic phone functions (i.e. making phone calls and sending SMS) with some pretty basic functions like a simple diary, calendar and maybe alarm clock. It would seem that the smart phone “revolution” took place with the introduction of Apple’s iPhone 3 back in January 2007; and then later the iPhone 3GS took the entire world by storm. Once this revolutionary device was released, competitors starting swooping into the market with their own versions of smart phones; and now we have models ranging from Google’s Android phones, HTC models, Nokia smart phones, Blackberries, Samsung (also on Android I believe) and many others. The survey I had released about 2 weeks ago sought to find out exactly how many people owned smart phones and what brand of smart phones they owned. The results are summarized in the table below:-

As can be seen from the above, a rather surprising 25.6% of responses indicated they do not own a smart phone. This was contrary to my belief that smart phone penetration in Singapore was one of the highest in the world and would stand at probably 90-95%. As it is, about 75% of people do own a smart phone; and it seems the most popular smart phone to own is the iPhone, taking up also 25.6% of the responses. This is in line with my observations at my work place, and in buses and MRT carriages. If we take the proportion of smart phone owners who own an iPhone, this % is about 33.3% which means about 1 out of 3 people who owns a smart phone is an iPhone user. Blackberry users, I am told, are mostly made up of business people who use one to remain contactable 24/7, while iPhone users are usually for leisure use. However, it has been reported that some companies are considering switching to the iPhone for corporate use instead of the Blackberry. Research in Motion should be pretty disappointed to hear this news, as right now they dominate the smart phone market with the highest market share.

Features – Necessity or “Good-to-have”?

With the introduction of smart phones and comments on the general industry out of the way, it’s time to drill down into the features aspect of these smart phones. Are they necessary or merely nice to have? My argument (since I do NOT own a smart phone) would be that these features have been shamelessly touted by phone companies as being “necessary” to remain updated, hip and trendy. Why carry a camera when your phone has one? Why bother to buy a PSP when you have a phone which can play games? And who even thinks of portable mp3 players at all now that smart phones are around to “bundle” these features all in one?

However, let’s step back and think back to the days when mobile phones were not even present. Back then during the “dinosaur” days (it must seem like the Dark Ages but it was actually just slightly more than 10 years ago), it was common for everyone to just carry a pager around and use public phones. Land lines were very common and everyone had an amazing sense of punctuality because it meant that when you made an appointment, you jolly well stuck to it as there was no way you could contact the person to change or postpone. I remember those days clearly when no one felt that mobile phones were necessary; then again I do admit these devices have indeed made life more convenient, and have allowed people to bridge distances to communicate with one another (e.g. overseas mobile calls).

Now, let’s take a step forward and ask ourselves if the basic functions of what a telephone should be have been “extrapolated” and “expanded” to include a myriad of so many other functions that perhaps the smart phone should cease to be called a “phone”. It should be renamed as a “mobile convenient hand-held multi-functional device” instead. The features present in such phones are an extraneous extension of the phone and do not add overall value to the device as a phone, instead it can be likened to a mini-computing device as it stores files, takes pictures and plays music.

Hence, I conclude that these features are “nice-to-have” but not necessary. Surfing the internet around the clock is hardly necessary, any more than it is to always “tweet” whatever you are doing, to making Facebook status updates even on the bus or train. So unless the smart phone allows you to grow revenues or do your job better to generate additional income, the associated additional incremental costs of such “features” appear to be a waste of money and do not represent value to the consumer, except to take up his time the user’s time and make him forget about the rest of the world around him. Many a time, I almost bump into people on the streets staring intently into their smart phones as they walk, or observe people who almost walk into walls, trees or other obstacles because of their intense focus on their phones. I used to think that this behavior was already prevalent during the days of the plain vanilla mobile phones when people were busy sending SMS, but it seems these smart phones have taken it one step further in their quest for distractions.

Costs Involved - A Comparison

This is the part where I break down the costs involved in maintaining a smart phone versus a plain vanilla mobile phone. I have used the most ubiquitous device, the iPhone, as a comparison as the proportion of people who had voted for it was the highest amongst all smart phone users. Note that my phone is a very old Nokia model (so old I can’t even remember the model), and I have been using it for about close to 6 years. It can do basic stuff like calling and SMS-ing, but cannot play mp3, radio or take photographs. Please see the table below:-

Interestingly, one can see that the cost of owning an iPhone 3GS 8 GB (not even the new iPhone 4) can exceed the cost of an old plain vanilla Nokia model by nearly 3 times, if you include the data plan maximum usage of S$30 per month and also depreciate the upfront cost over 24 months (i.e. 2 years). This would imply that the average phone bill for the iPhone user would hit about S$50 to S$60+ a month, while my own Nokia phone bill usually averages around S$30 to S$40 a month (all numbers are quoted before GST charges). If we exclude the upfront costs of an iPhone, one still has to pay about 25% to 50% more per month for an iPhone as compared to a plain vanilla mobile phone.

Let’s then take an example where the iPhone 3GS 8 MB had no upfront costs. For this case, the monthly subscription itself would be S$95 per month, more than 250% of the monthly costs of a plain vanilla phone. In other words, there is no way to “escape” the costs of owning a smart phone – you either pay a much higher monthly charge for 2 years or else pay a higher upfront fee to own such a device.

To conclude, owning a smart phone is an expensive affair, and can increase your costs rather significantly as compared to a plain vanilla mobile phone. Most of the features are also “nice-to-have” but not absolutely necessary. For photo-taking, a digital camera will suffice; for mp3, a cheap model mp3 player will do; and for internet access, perhaps one can just have the patience to wait till one gets home to surf the Internet and update their Facebook pages. After all, patience is a virtue!

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.