SIA Engineering has been an investor’s favorite for many years because of their moats servicing the maintenance and repair lines for various different airlines, with their own SIA planes taking up the majority of the recurring business.
It does look like a defensive business because every capacity planes that are increasing each year would have to undergo maintenance one way or another.
Over the years, the operating environment gets tougher due to longer maintenance interval perhaps as the quality gets more resilient for the newer next generation aircraft and there are many more competition in this small niche space of the industry.
The JVs are giving them good growth over the years as the company continues to invest in this segment partnership, notably with Stratasys in the areas of manufacturing technology and Cebu/Airbus for their respective maintenance with the airlines.
This year alone, the share price has dropped from $3.20 to today’s low of $2.47, that is a drop of over 22.8%.
If you are someone who held this stock from the start of the year, you’d probably be screwed all over by now.
But is there really no value to this? What would be a good price to enter for this company?
I run my model using the discounted cash flow methodology by forecasting the terminal growth over the next 5 years to 1.2%, with an initial -1% for the first 2 years, then 2% growth thereafter.
I added back the depreciation which is a non cashflow item as well as their investments in the JV & Associates which are quite significant.
Their investments in the various JV & Associates are quite an important element to their business model so it is probably fair to value them separately.
What we are saying here in the DCF exercise is that we will take them out and see how much is the true value of the SIA Eng business.
PER of between 18x to 22x is probably a fair way to value this company with a discount rate of 8%.
What we get is an intrinsic value of about $2.66, which is about 7% higher than today’s price.
Do note that this implies some growth into the future so if there’s further deterioration to the business, then the value would plunge much further.
For investor, there’s probably not enough margin of safety yet in this one.
The company has just recently cut its interim dividend and the balance sheet is weakening.
There’s also no sort of catalyst at the moment and there are much better dividend counters out there to buy at the moment.
Thanks for reading.
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