SIA Engineering has been one of my personal favorite and a darling company for many investors which has seen its dividends grow from 16 cents to 18 cents, 20 cents, 21 cents and finally 22 cents in the past 5 years. The management has also returned shareholders value well with ROE > 20% in the past 5 years.
I last sold the shares at a price of $5.01 in Jun (before it went ex-dividend) and I bought them back today at a price of $4.61 to add to my portfolio. So why did I decide to buy them back at this price?
A quick look on its recent results for Q1 FY13 may left investors with somewhat disappointments. A company who is seen by investors to have resilient core earnings have reported dipped topline results. Revenue and Operating Profit have dropped quite a bit, by 3.7% and 19.5% respectively compared to previous year. Though the company is still capable of generating FCF through their operating cashflow income and dividends from its shared associates and JV, I bet not many are expecting an increase dividends this year.
But the key behind SIA Engineering success which many had overlooked has been its profits with its associates (Pratt & Whitney) and JV (Rolls Royce*). Profits on Shared Associates and JV companies have turned on a strong performance in Q1 FY13, recording a strong 14% YoY growth compared to previous year. This has helped to mitigate the underperformance of its fleet management revenue and profits. Depending on the growth level of the JV business, this could be the key to unlock values for SIAENG for its recurring maintenance business with potential carriers such as Airasia, Malaysia Airline, Thai Airways and Virgin Atlantic.
*Singapore Aero Engine Services Pte – a joint venture between SIA Engineering, Rolls-Royce Holdings Plc and Hongkong Aero Engine Services Ltd.
At my cost price of $4.61, it represents a dividend yield of 4.8% at a payout ratio of almost 90%. I am expecting an increased profits and dividends from its associated and JV in years to come, which I think will be key to unlocking further shareholders value. I also hope the efforts from the government to build Changi Terminal 4 and 5 by 2020 will also materialise which will boost up the airline and tourism industry. Valuations is rather fair in terms of its Price to Earnings multiple, which is currently closing in between 17-19x. As always, I rather buy a great company at a fair price than a fair company at a great price. For SIA Engineering, I think I have added a solid blue chip company to my portfolio.