Tuesday, July 10, 2012

SIA Engineering Company (Financial Statement)

SIA Engineering Company (SIAEC) is a leading provider of maintenance, repair and overhaul (MRO) services of aircraft as well as providing line maintenance services and technical ground handling in Changi Airport as well as in airports in USA, Hong Kong, Indonesia, Philippines and Vietnam. Without further ado, let's look at the financial statement of SIAEC.

Figure 1 - Income Statement

Revenue has been on a slowly increasing uptrend from $878m in 2002 to $1.17 bn in 2011 which is an increase of 33% in 10 years. Other than in 2003 where there is a huge dip in revenue of 25%, the business is fairly recession proof with a 5% drop in 2009. This has to do with its business model which I will explain later. For expenditure wise, Staff cost is the highest contributor as the business is essentially reliant on a skilled labour force to perform MRO. 2nd biggest cost is material costs which is all the spare parts and repair material used in MRO of the aircraft. Together, they make up 58.9% of the total revenue. 

Something not commonly seen is that the net profit is always higher than the operating profit. This is due to the fact that it has 25 joint ventures and subsidiary which contributed a significant amount of profit. This has been part of its expansion strategy as it sees a limit to its organic growth. Since 2006, contribution coming from investment, associates and JV have exceeded 50% of net profit, and this will be discussed in greater detail later on. 

Figure 2 - SIA contribution to revenue

With the support of its parent company, SIA accounts for a huge portion of SIAEC's revenue. The figure is derived from SIA's annual report using inter-segment revenue under its engineering arm. I have also pro-rated the figure to account for the distribution of SATS by SIA in 2008. SIAEC provides technical support to Beijing Aviation Ground Services Company which is a JV by SATS. From the above table, we can infer that SIA contribution has been very stable over the decade and it is contribution from other airlines that have been driving growth in the top line. 

Figure 3 - Balance Sheet

There's also something very interesting about its balance sheet which is that it does not have any Non-current liability in the annual report. I have decided to classify the "deferred taxation" found under equity as long-term liability in line with the usual form of presentation. The company is very cash-rich with insignificant debt such that cash + short term deposit is around 40% of total equity. Receivables is insignificant being at around 8% of total revenue, which means they are collected every 28.56 days. PPE comprises another $300m and it is made up of $165m in leasehold land and building, $90m in Aircraft Rotable Spares and $37m in plant, equipment and tooling. Aircraft Rotable Spares are anything that requires routine replacement like enginer, pumps and tires. We can see that equipment needed for MRO is not very capital intensive. For its liability, it is pretty impressive that it is more than twice the amount of receivables at $263m. At a day payable outstanding of 82 days, it shows that SIAEC has significant leverage over its supplier. In all, this is a very clean balance sheet.

Figure 4 - Cash Flow Statement

For the net cash flow from operating activities, profits coming in from investment, JV and associates are being taken out and only the dividends are accounted under cash flow from investing activities. In calculating the FCF, I have taken into account purchase of intangible asset, dividend received from long-term investment, associate and JV. FCF/Net Profit ranged from 50% to 94% usually, and is susceptible to some fluctuation as they may not received 100% of profit from associate as dividend. There is a noticeable dip in 2007 and 2008 and this is due to much higher capex by the company in ensuring that its maintenance facility is A-380 ready. As such, get ready for a slight drop in dividend the next time there is another mega jumbo plane coming out. Under normal circumstance, the company should be able to maintain a FCF/Net Profit of around 85%.

Figure 5 - Financial Ratio

SIAEC has managed to maintain an operating profit margin of above 10% for the decade. While this might not be the net profit margin, the only negative item to deriving the net profit is taxation. Net profit margin might not be an accurate representation as they are being falsely inflated by the huge amount of share of profit of associate, JV and dividend from investment which are not accounted for in the revenue.

For a more accurate picture, we will then have to look at the ROA, ROE and ROIC. The figures are strong with ROA and ROE staying above 15% and 18% (other than the 2003 SARS) and ROIC above 14%. Discounting the effect of JV and associates, I have also did an adjusted ROA and ROE to look at SIAEC's organic operation. Adjusted ROA managed to stay above 11% while ROE is 13% which goes to show that its organic operation provides respectable return as well.

By all counts of financial leverage ratios, SIAEC has a very clean balance sheet as explained earlier. It has excellent working capital management as it has a negative cash conversion cycle of at least 30 days and more. Basically, this means that SIAEC can afford to distribute all its cash and short-term deposit without affecting its ability to continue operation. Not many firm has a negative cash conversion cycle.

The next part will be on the operation aspect.