SIA Engineering

[cif5000]

1. S$5.00++
When was that?

2. SIAEC in 2007 had not established itself as it did when compared to FY 2011
That was my question, "What have fundamentally changed within the last 2-3 years?"

I can't recall the exact period, but Yahoo Finance will give historical prices for any listed company. Fact is there was a time it traded at $5.00++, unless I recalled seeing the wrong information.

According to my research, it now has more JV and associated companies in FY 2011 as compared to FY 2007; and it is through these JV that the earnings and cash flow in (through dividends). That is what has fundamentally changed.

1. If you looked at Yahoo Finance, the stock has never crossed the $5 mark.

2. JV. The group has had this strategy for a while already. That fundamental change did not take place between 2007-2010. It happened long before that.

[Musicwhiz]

I stand corrected then, on the $5.00 remark. Will go and check again, sorry if I got it wrong.

As for fundamental change, I had meant the Company now has more JV as compared to FY 2007 - I did not imply a fundamental SHIFT in their strategy. I am quite aware that the JV/Assoc strategy has been in place since FY 2001 when they listed. Think you should define "fundamentally changed" since it may be open to mis-interpretation. To give an example, if the company now has say 24 JVs compared to 20, it has "fundamentally changed" because they had managed to grow their JV base.....

Thanks.

[kennynah]

for all these effort ...if it was me, my hand "sng" liao loh.....

i wish you all huat huat....cheong past $5...go go go.....

[Musicwhiz]

Hi cif5000,

Just did a quick check. Yes you were right SIAEC's highest closing price was S$4.96 on Sep 27, 2007, and the highest it reached was S$4.98 intra-day on the same day. Apologies for the oversight.

[cif5000]

Think you should define "fundamentally changed" since it may be open to mis-interpretation. To give an example, if the company now has say 24 JVs compared to 20, it has "fundamentally changed" because they had managed to grow their JV base.....

haha....maybe I should but not now. Do check back your definition some years later and see if it has fundamentally changed. That's the cornerstone for FA.

[mrEngineer]

Hi Mr. Engineer!

Yes, frankly I do miss the detailed FA postings on individual companies which used to be found on another value investing forum (but which has since gone down); I learnt a lot from the "gurus" and experts there on FA, but there's always room for more growth, learning and improvement!

Haha when you mentioned about growth, learning and improvement, it just reminds me of my engineering manager trying to justify why it makes less sense to be a banker than an engineer. lol. anyway out of point.

I feel that using a Company's "peak market price" during good times is not always a very reliable indication of how it will perform in future (in terms of share price, not business fundamentals mind you). First off, remember that companies like SIAEC pay dividends, and quite a lot of it too (it was 18c for FY 2010 and 20c for FY 2009, making it a total of 38c alone in 2 years!); therefore the share price should account for the payment of dividends. To give a very simplistic example - if SIAEC was trading at $3.00 BEFORE the payment of dividends; technically it should then trade at $2.62 ex-dividend ($3 minus 38c over 2 years). The fact that SIAEC continues to generate good profits and FCF means that the share price (based on valuations alone) may still continue to hover around $3.00, hence an investor actually "gains" through dividends even if recognizes no capital gains on his investment. To carry the example to its extreme, let's say SIAEC pays out $3.00 worth of dividends over X years, yet the share price is still $3.00, does it then mean that SIAEC is not trading near "peak price"? There is no way to objectively assess "peak price" if one takes all the dividends into account, I feel.

I disagree with you on this MW. First of all, we know that share price is a function of the future dividends to be provided by the company and discount it accordingly to get the present value which equates to the value to be paid for the company. So when its trading at 2.62 prior to dividend, it should has already priced in the expectation of future dividends. I concur with you on this when it is a special dividend basis but not so for annual consistent dividends.

Thus, I am unable to relate on how the peak price and $3 worth of dividends cumulated along the years. It does not make sense to me.

The previous peak price does not give much indication on how the next peak price will perform. However it does give some indication when market is in less overbought scenerio, its potential/room to growth assuming if the conditions occured previously at the peak remained in the current status. And this information itself will turn out valuable in choosing stocks.

Secondly, peak market price may be either a function of market sentiment, or it may be a direct indication of the fundmental merits and strengths of a good business. The job of the investor, of course, is to find out which prevails at any point in time. If we were to look back (using hindsight, of course) at 2007 when almost all companies on SGX were trading at high valuations and all-time high market prices due to the bull run and associated (overly) exuberant optimism, then it will become blatantly obvious that SIAEC was trading at a high market price due to sentiment, rather than fundamentals. But the problem here is that hindsight bias is always at play when we look back at market price (through charts), and it will be impossible to understand the interplay of sentiment and fundamentals determining a market price into the future. My point being that price may be an indicator of either sentiment or fundamentals, or even both or a combination; and an investor has to studiously study the business to determine if said valuations are justifiable at any point in time, so that he has margin of safety and can preserve his capital.

Thirdly, there are also businesses which continue to grow and generate decent and healthy profits and FCF in spite of recessions and downturns. Notice that for SIAEC’s case, though profits of course had dipped with the recession back in 2008-2009, they continued to generate healthy FCF and most importantly, also went on to form more joint ventures with partners (a growth strategy in place since their listing in FY 2001). These new joint ventures are testament to SIAEC’s reputation and their long-term vision of growing the business through such strategic alliances. A business which is growing and expanding (albeit slowly) would eventually, in time, become more valuable and translate into a higher share price, ceteris paribus. It is thus important to keep a keen eye on the business which you intend to invest in, as eventually share prices will move along with the fortunes of a business. To me, SIAEC is a high probability event of being able to not lose my capital and also earn a decent return on my investment; to me the market is only irrational if it values SIAEC way above the 10-year average metrics of PER and P/B.

In this discussion of sentiment vs fundamentals have set me thinking that if I could try to normalise air travel data vs SIAEC, I might be able to spot periods belonging to sentiment or fundamentals. I googled on air travel statistics but could not find any free source of available information on such data. Thus, I used SIA stock price instead and made the assumption that SIA stock price is mainly influence by aviation industry forecast and outlook. In this aspect, plotted figures of P/Sales may provide some interesting trends.

SIA vs SIA Eng.JPG

I have attached the picture of the charts. One observation is that during 2006 to 2008 the SIA/SIAEC values actually visited levels of 5 and below. The lower the value, the higher SIAEC price is relative to SIA price. What is interesting is that this observation is seen again in recent times where the value has fallen back to below 5 levels. Thus, this might be a indication that the recent times may be a sentiment driven one. Of course I had airline travel data, it would be better comparison.

This hypothesis is moreover verified by the fact that SIAEC has consistent financial performance throughout the years with stable FCF and ROE. This goes to show that valuation is pretty easy for the company by projecting the future dividends and obtaining a present value for it. Thus the stock price being the function of the future dividends couldnt be possibly increasing continuously unless the market expects that significant special dividend to be given or the company income is continously growing. Thus, we can somewhat say that the SIAEC prices recent rise is driven sentimentally.

On your point about purchasing at “more decent times”, I will point you to what cif5000 said in an earlier posting on this thread. He said we must decide the best way to deploy our (limited) capital at any point in time, after assessing the prospects of all investments which come our way. During the market lows in March 2009, I had my eye on other companies which I had researched; thus I did not manage to buy companies like MTQ, Kingsmen or even SIAEC more cheaply as they were not “on my radar”. Remember that in investing, I am essentially a “one-man show” or doing all the intensive research myself, and there is no one out there who will point me towards a good investment (because there is no free lunch in this world). Therefore at any one point in time, I focus my efforts on identifying one good company to invest in due to limited time and personal resources.

Finally, I would like to add that investing is not about comparing who has the better return, and I am never interested in whether I “beat the market” or not. As an aspiring value investor, I realize that absolute profits matter more to me than to constantly compare if I am doing better than either someone else, or the market indices. Of course, some may argue hey why not just buy an ETF and sit back and relax? But investing is a intellectual challenge for me and I relish it! The point is yes if I could turn back the clock I would have bought the companies I own now at much lower prices – then again it’s silly to assume they will ever see such market prices again in the near future. Since valuations are decent and not excessive, I have channelled my capital into these companies instead of holding on to cash, which will be eroded severely by inflation amid a low deposit rate environment.

My highlight was more in the long term benefit of this stock which inevitably leads me to query on the timing choices made to invest at the more decent times. I could not see how much upside you might gain in the long term based on the price you are paying for now.

Another point I would like to make that, instead of buy or sell option after evaluation in a company, there can be a KIV category where you can put in stocks after the tremendous research performed and yet it is not the best time to buy it. When I was doing all sort of analysis for Sinotel, I couldnt bare to sell it, despite bad financial probelms, due to the amount of effort put into understanding and researching it. So if you feel compelled to make a decision because of the completion of the research done, you probably could use the KIV option and await for another opportunity where it makes sense to deploy the recommendations.

[Musicwhiz]

I disagree with you on this MW. First of all, we know that share price is a function of the future dividends to be provided by the company and discount it accordingly to get the present value which equates to the value to be paid for the company. So when its trading at 2.62 prior to dividend, it should has already priced in the expectation of future dividends. I concur with you on this when it is a special dividend basis but not so for annual consistent dividends.

Thus, I am unable to relate on how the peak price and $3 worth of dividends cumulated along the years. It does not make sense to me.

The previous peak price does not give much indication on how the next peak price will perform. However it does give some indication when market is in less overbought scenerio, its potential/room to growth assuming if the conditions occured previously at the peak remained in the current status. And this information itself will turn out valuable in choosing stocks.

Interesting discussion indeed Mr. Engineer, and one which I really enjoy participating in, haha. Allow me to give my take on the views you expressed above.

Note that my "simple" analysis of the price charts was made based on subtraction of dividends from the share price over the years as dividends are being paid out. If you start to account for expectations of dividends and special dividends, that changes the equation and makes the whole issue much more complex, and I am afraid my explanation alone will not suffice. I wa smerely giving a simplistic example using price minus dividends as a proxy for "peak price", but apparently since I am really not good with market prices I think I better stick to what I know better haha....

You are right to say that future performance is not dependent on the past, especially when it comes to market prices. New peaks can always form due to changes in valuations and/or fundamentals. It is these facts that I use (i.e. valuations and fundamentals) to select stocks and in this case, SIAEC had the ingredients for a prudent investment.

In this discussion of sentiment vs fundamentals have set me thinking that if I could try to normalise air travel data vs SIAEC, I might be able to spot periods belonging to sentiment or fundamentals. I googled on air travel statistics but could not find any free source of available information on such data. Thus, I used SIA stock price instead and made the assumption that SIA stock price is mainly influence by aviation industry forecast and outlook. In this aspect, plotted figures of P/Sales may provide some interesting trends.

I have attached the picture of the charts. One observation is that during 2006 to 2008 the SIA/SIAEC values actually visited levels of 5 and below. The lower the value, the higher SIAEC price is relative to SIA price. What is interesting is that this observation is seen again in recent times where the value has fallen back to below 5 levels. Thus, this might be a indication that the recent times may be a sentiment driven one. Of course I had airline travel data, it would be better comparison.

This hypothesis is moreover verified by the fact that SIAEC has consistent financial performance throughout the years with stable FCF and ROE. This goes to show that valuation is pretty easy for the company by projecting the future dividends and obtaining a present value for it. Thus the stock price being the function of the future dividends couldnt be possibly increasing continuously unless the market expects that significant special dividend to be given or the company income is continously growing. Thus, we can somewhat say that the SIAEC prices recent rise is driven sentimentally.

It is interesting that you chose to compare SIAEC with SIA, in the absence of objective data about air travel. I would think that even though SIA is a good proxy of air travel demand, the business of SIAEC is not completely tied to air travel volume, as the business model itself is a lot more resilient than SIA when it comes to "shocks", recessions and downturns, as evidenced by the consistently high ROE and FCF. Making a comparison using P/Sales may not churn out the accurate data you are looking for, or be able to give appropriate insights for you to make conclusions.

The reason for this is that a company's valuation and market price are more than just the sum total of the current aviation/airline industry, and by comparing it this way it assumes that you can attribute a large part of SIAEC's value to air travel demand, which I feel may not be capturing the full picture. In fact, the reason for the high P/Book and relatively high PER is because of the stability of earnings and the consistently very high ROE over the last 10 years; in addition to the high FCF which is generated as well as increasing dividends over the years.

Let me caution that valuation is never "easy" for any company due to the changing nature of business conditions, as well as competition and other factors which make up the economic landscape. The company's share price is more than the DCF-derived total of all future dividends and cash flows (even though in theory, it is supposed to be this way!). And to add on, SIAEC's share price may also be a function of future perceived growth other than just churning out consistent dividends. After all, the announced JVs with P&W and setting up of an MRO Facility in the Middle East recently all point to signs of potential long-term growth, rather than stagnation. So it is never that straightforward to conclude if the current market price and valuation is sentiment or fundamentals driven. If I could safely make a statement, I would say it's always a combination of both, just to what degree.

My highlight was more in the long term benefit of this stock which inevitably leads me to query on the timing choices made to invest at the more decent times. I could not see how much upside you might gain in the long term based on the price you are paying for now.

Another point I would like to make that, instead of buy or sell option after evaluation in a company, there can be a KIV category where you can put in stocks after the tremendous research performed and yet it is not the best time to buy it. When I was doing all sort of analysis for Sinotel, I couldnt bare to sell it, despite bad financial probelms, due to the amount of effort put into understanding and researching it. So if you feel compelled to make a decision because of the completion of the research done, you probably could use the KIV option and await for another opportunity where it makes sense to deploy the recommendations.

You seem to imply that the price paid for is a little too "expensive" for me to see a decent long-tern return. I do question that opinion, as the nature of the business is one of generation of a lot of FCF and earnings from JV and associates are also growing. Even assuming that the company remains stagnant (no growth), there is still a yield of 4+% to enjoy as the cash generation ability is not impaired permanently in any way. I think the "upside" you are referring to is capital gains, but I must remind you that total returns is a function of BOTH capital gains and dividends. As I view SIAEC's business as being of a very stable nature, I cannot immediately project a permanent impairment in its ability to generate earnings and cash flows; hence my principal return will be solely focused on dividend yield as a cushion. My aim in investing is to preserve capital, and through the dividend yield over the long-term I think I can achieve that, IMHO.

As for "KIV" stocks, you'd be surprised that there are many companies I have put into this bin for KIV! In fact, just to let you know, companies like Rotary, PEC and Hai Leck (just to name a few) are under my KIV bin, and I will monitor their business more in future quarters before deciding whether to allocate capital. I was not compelled to make a decision on SIAEC, in fact I saw it as a good place to park my monies for yield higher than both inflation and bank deposit rates. There was also quite a bit of research I did on other companies as well (i.e. downloading and reading annual reports etc), but usually if it does not check out I will "terminate" my research instead of going all the way. So it's not a case where I die die must research all the way yet find an investment unattractive. If certain metrics or facts do not check out, then I just stop. No point wasting more time/resources/energy on it; and I can put it in my KIV bin if I think it has future potential.

Hope this explains!

[cif5000]

I learn a new word today - soliloquy, and here's mine.
1. Do we really need "in-depth research" to look for a 4% return?
2. Do we really need "in-depth research" to confirm a blue chip is fundamentally sound?
3. Are all changes fundamental changes?
4. If not, how do we determine what are fundamental changes? Is a 20% increase in revenue fundamental? Yes, provided the "how" has changed. No, if for the past 5 years, it has been growing at similar rates.
5. Commitment bias reinforces confirmation bias.
6. The urge to write a lot about something so simple is incomprehensible.

[kennynah]

I know which thread to go if I wana read a novel

[Musicwhiz]

I learn a new word today - soliloquy, and here's mine.
1. Do we really need "in-depth research" to look for a 4% return?
2. Do we really need "in-depth research" to confirm a blue chip is fundamentally sound?
3. Are all changes fundamental changes?
4. If not, how do we determine what are fundamental changes? Is a 20% increase in revenue fundamental? Yes, provided the "how" has changed. No, if for the past 5 years, it has been growing at similar rates.
5. Commitment bias reinforces confirmation bias.
6. The urge to write a lot about something so simple is incomprehensible.

To answer your questions simply,

1. Yes, unless you think the 4% is guaranteed and assured without question.
2. Yes, because some blue chips may not be.......
3. Yes, if it's important (to each his own)
4. We determine them by how we think it will affect the company in question.
5. This is not a question, so all I can point you to is the fact that the research was in stages, therefore no commitment at initial stage until there was confirmation from my research as I went along.
6. I also feel the same way, but then again in order to explain myself I tend to get a tad long-winded. I apologize for that sincerely; but it's not my intention to "write a lot".

Thanks, cif5000