I reproduce this from my investment diary. Welcome comments.
(Note to admin: Hope to consume more of your bytes)
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Mon 20 Oct 2008 - 21:50
A comparison of SIA Listed Subsidiary.
Both SIA Engineering and SATS are subsidiaries of SIA. They were listed at the same time on the SGX and their share prices had tracked each other rather closely all this while. Their reported profits had also been very close. Drawing their revenues mainly from the parent company, their growths were also tied to SIA performance and on Singapore performance as a global air travel hub. SIA owns more than 80% of the shares outstanding although rumor has it that those shares will be divested soon. I doubt so especially since the market has nosedived in the recent months.
Although quite similar in some aspects, their businesses differ significantly. The table below tabulates a comparison between the reported numbers in FY08, purely for my own reference as all information are readily available in their annual reports – both are very comprehensive accounts I would say.
From AR08:
Technical Expertise
The qualification, experience and education of employees of SIAEC has to be higher (engineers and specialized technicians) compared to SATS (check-in counter staffs, catering staffs). This translates to higher barrier of entry. Although the barrier of entry is a summation of many other thing, the staff expense constitutes the main portion as witness by it highest cost. The more technical it is, the higher the barrier becomes. It takes much more time to train and qualify a jet engine technician than to groom a baggage handler.
Customer Risk
The risk of a bad service/product is determined by 3 factors: Occurrence, Consequence, Detection/Control. Incidentally, from the risk management perspective, the consequence of a bad aircraft maintenance can be disastrous, both from a passenger point of view and business point of view. I believe, not sure, that Qantas has chosen their regional service center to be based in Malaysia. Such short term cost savings may cost the company much more into the future. Just witness the sudden increases in the number of incidences. Therefore, if I were an airliner, I would choose a more reputable service provider and pay slightly more than to compromise my safety record.
On the other hand, having a luggage delayed by 10 minutes or a bad meal on board wouldn’t create such a big hoo-hah. These risks can be mitigated with a detection/control policy – with no fatalities.
Capital Expenditure
The presumption on an engineering company is that the capital expenditure is high, usually to procure state-of-the-art equipment to stay at the forefront of the technological race. However, it seems that SIAEC does not need to face with that problem. I like to think of it as a Vicom for aeroplane inspection, albeit more sophisticated. Spending <60m on capex against a revenue of 1bn and a depreciation expense of 33m, the business is definitely coughing out cash. The construction of a hangar would probably be the biggest capex.
Other Expenditure
The Operating Cash Flow from SATS is 3 times as much as SIAEC. However, it seems that the business has hit the wall. Diversifying into the catering business via Country Road into Macau casino, Does that mean that serving the airline business has not had much room to work on? I detest companies diversifying from the core businesses. In other words, the predictability of SATS future is not as good as SIAEC. For SIAEC, the conversion of 747 passenger liners to freighters will at least keep it occupied for the foreseeable future. As much as I hated contract based jobs, the probability of SIAEC getting non-SIA projects will be high if it proves its capability in this area, while enjoying the first mover advantage, thanks to SIA.
Bargaining Power
ZERO. Being 80% owned by SIA and with the majority of the businesses coming from the parent, forget about bargaining. Applicable to both businesses. The profitability depends largely on the profitability of SIA. If SIA flies into some financial difficulties, the profits of both subsidiaries will be squeezed tightly. That means, should SIA sold its stakes in her subs, expect the profit margin to decline substantially. I can also imagine how their profits will be squeezed should SIA decide to divest the shares. Then, there is no incentives to pass the profits to the subsidiaries and get the money back as dividends.
About Singaporeans
This is purely my own opinions. Singaporeans are better on technical jobs than on service jobs. At least, the Chinese smiles are sweeter.
NOTE: This is written on my flight to Shanghai while having my 6th beer, and with a strong biasness towards SIAEC. I was initially favoring SATS simply because of the negativity towards contract-based and engineering-based nature of SIAEC. I reverse my bias.
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Wed 22 Oct 2008 - 2:13
A look at Goodrich gives us a brief idea about the type of margins and operating indicators that can be expected out of a MRO business.
http://www.goodrich.com/annualreport200 ... AR2007.pdf
The MRO business is segmented under the Nacelles and Interior Systems.
Operating Income/Revenue (in millions US$)
2007: 531.0/2,169.0 (24.5%)
2006: 416.3/1,983.5 (21.0%)
2005: 320.9/1,734.9 (18.5%)
Slightly lower than SIAEC Operating Margin of approximately 27%
Capex/Depreciation (in millions US$)
2007: 135.9/77.1
2006: 107.9/72.2
2005: 79.0/67.6
Capex and depreciation are slightly above 5% and 3% of revenue, comparable to SIAEC.
Assets Employed (in millions US$) (ROA)
2007: 2,505.6 (21.2%)
2006: 2,148.6 (19.4%)
The reason for checking these numbers is to give me an indication whether SIA had been benefitting SIAEC. The motivation for that is to fetch a higher selling price if they decide to sell (and then squeeze the new owner).
Looking at Goodrich, it seems like the MRO business is indeed a lucrative one.
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Wed 22 Oct 2008 - 20:54
Goodrich specialization is in landing gear. If I am not wrong, SIAEC engages them on this area.