Sunday, July 22, 2012

Lessons Learnt From My First 3 Months

Not too long ago, I was introduced to this portfolio tracking tool on Excel called the XIRR. I give up on using it as it don't seemed very accurate or perhaps I made some error because I don't fully understand it. Since I have compiled my trade history, I think it will be useful to share my wonderful experience with the market during my first 3 months. It was a really good experience and without with I think I will not have improved much especially when it comes to emotional balance.
Figure 1 - Trade History

So this is my trade history when I just started out in the market. The decision to take the plunge at the onset of the current Euro Zone crisis last September is a wise move as I started to get used to market gyration. So on 22nd September 2011, I got my trading account and bought my first 2 stocks - VICOM and Eratat. VICOM was a great choice and I bought it for I think it is a great piece of business. 

For Eratat, I thought it was being deeply undervalued and I was drawn into its story of going up the value chain to price itself as a premium brand.  Profit margin is growing and profit and revenue have been jumping higher each year. Coupled with its high cash position and low P/E of less than 2, it looks like an ideal value stock. I sold 2/3 of it in 10th November 2011 at a loss of 9.7%. Lesson Learnt - Accounting skill is extremely important when doing fundamental analysis. 

3 days later, I flew to Australia as part of military exercise and thus I did not do any trading until I came back   at the end of October. I bought into this stock called Sunvic Chemical as it has some share buyback programme and I think it is going to deliver a good quarterly result as price of the ester commodity seemed to be doing fine. Subsequently, I can no longer stand the price fluctuation and decide to sold it at a loss. Lucky, I sold it as it subsequently reported a 40% drop in quarterly profit. Lesson Learnt - Do not buy a stock if you cannot stand the price fluctuation.

While the loss was only 2.97% and maybe a few hundred, I cannot take the losses and was determined to get back into the black. Not long after, I got to know about this stock called Mewah through some investment website and blog. Basically, there was insider buying and speculation that it will have be a turnaround for the next quarter. I was hoping to be able to recoup my losses but I ended up losing money yet again though I was quick to cut my losses. Lesson Learnt - Don't buy on rumours.

As I continue to slump into the losses, I was even more determined to get out of it. So I went into Sunvic again, hoping to make some quick bucks. Luck was not on my side and I sold it off 4 days later at 4.94% losses. Lesson Learnt - Things get worse when you are speculating aka gambling...

Subsequently, I bought into UOL($4.26) since it seemed to be undervalued though I did not really do much analysis. 2 days later, ASSD was announced and all the property counter starts to crash heavily and I sold it at a 5% loss once again. Of course, if I have done my homework I might not have sold UOL given that it holds hotels, offices and retail malls. Lesson Learnt - Always do your homework.

I also bought into SIA Engineering as I want to reduce my "gambling" chips as I am quite scared about the losses coming from speculation. However, I did make a mistake in buying again the next day at $3.53, thinking that I was averaging down. Lesson Learnt - Averaging down target should at least be 10-20% lower.

After that, I bought OUE at $2.05 and sold it at $2.05 incurring brokerage losses. Once again, I was trying to recoup my ballooning losses but I cannot take it and sold it. Lesson Learnt - Even if you manage to sell away your stock at the original price, you will still be incurring brokerage losses. 

Then I bought into SMB United as a arbitrage play given that the original offer from Boer is a bit too cheap. I was thinking that even if the offer fails, the company is still worth more. Finally, Lady Luck smiled on me and I got away with a 13.2% gain though I am still quite in the red.

Getting away lucky, I venture into CD/XD play with UtdOAus which was trading in SGD but declared the dividend in Aussie. I got away with a 2.68% gain though I am sure I am still speculating.

At the end of the year, I bought into San Teh upon the declaration of dividend distribution the previous night. Not only was i speculating, I keyed in twice the amount as I was not aware that I failed to cancel the previous trade. Needless to say, I made ~8% losses again as I sold it within 3 days as I know I do not have enough money to pay for it. Lesson Learnt - Always check the trade that you have entered especially if you are doing online trading on your own.

In all, I made 11% in realised losses using NAV within 3 months and I told myself that I am going to stop speculating once and for all. I have read The Intelligent Investor before I have started, but I simply cannot control the very powerful feeling of greed and fear within me. 

However, I am glad that I have paid for the lesson and become determined to follow the proper path. I restructure my portfolio and sold the loss-making Eratat. I bought companies like HR Glass ($1.06) and additional stake in VICOM before the minor bull returned in 2012.

Summary of Lessons Learnt –
  1. Accounting skill is extremely important when doing fundamental analysis. 
  2. Do not buy a stock if you cannot stand the price fluctuation.
  3. Don't buy on rumours.
  4. Things get worse when you are speculating aka gambling...
  5. Always do your homework.
  6. Averaging down target should at least be 10-20% lower.
  7. Even if you manage to sell away your stock at the original price, you will still be incurring brokerage losses. 
  8. Always check the trade that you have entered especially if you are doing online trading on your own.
That's why I have always said that I am blessed to have started on September 2011 in the midst of the trial and tribulation ongoing in the market. The bear is where you learnt the most as it is akin to putting yourself on a survival mode out in the open sea. If I have started in a bull market, I supposed I will have made much better gain before my portfolio will get wiped out when the bear returns. I am happily waiting for the giant bear to come though it will probably not be any time soon. That will be where I can get to understand my character and emotional balance best.

Saturday, July 14, 2012

SIA Engineering Company (Operation)

Fig 1 - Operating Segments

SIAEC has 2 core operations in repair and overhaul as well as in Line Maintenance. Line management makes up around 35% of total revenue while repair and overhaul makes up the other 65%. However, if we were to look at the results, line management makes up 65% as compared to 35% for repair and overhaul. This implies that line management is a much more profitable business for SIAEC as compared to repair and overhaul.

Repair and Overhaul

Under the rules of aviation authority worldwide, planes have to undergo periodic inspection before they are allowed to fly off (being deemed airworthiness). This rule is implemented to ensure the safety of passenger as a faulty plane is fatal in the air. Other than the scheduled routine maintenance, SIA also provides other services like aircraft modification,  paint stripping, conversion of  aircraft cabin interiors and e.t.c. Fees are typically being charged based on a fixed fee per man-hour as well as cost of all the materials used. 

Commonly, there are 4 checks which a plane has to undergo throughout its lifespan in order for it to be approved for flying off. These are known as the "A", "B", "C" and "D" check. "A" check is the most basic level of check and will be done every 500 flight hours. "B" check is an expanded form of "A" check and is done every 4-6 months. "C" check involves the whole aircraft and is performed every 15 months or 5000 flight hours. The aircraft will have to be put out of service for around 1-2 weeks when performing a "C" check. Last but not least, "D" check is performed every 25,000 flight hours or 5 years, whichever is earlier. This is the most comprehensive and expensive check and will take around 1-2 months to complete. For the reason of cost, some airline might choose to scrape off the plane before it reaches its next "D" check.

Theoretically, we can hence view this part as fairly resilient as an airline has to continue its scheduled maintenance unless they choose to ground it or scrap it. Decision to ground an aircraft may not be the most cost-efficient move. Planes are not cheap and with a lifespan of 15 years (for SIA's plane), grounding it for a year or 2 will represent a waste of capacity. Other planes will also has to bear with heavier load and should the airline decides to de-ground it all the previous check missed will have to be carried out. For your information, "Aircraft maintenance and overhaul costs" represent 3% of total revenue for SIA. 

Figure 2 - Number of Registered Aircraft

Given that SIA and its subsidiaries and associates account for a huge percentage of total revenue, let's have a look at their number of registered aircraft throughout the past 5 years. As seen from the table, there has only been a slow increasing trend for SIA, Silkair and Tiger Airway (30+% owned by SIA). During the difficult time of 2008 to 2009, we hardly see any contraction in the numbers. For 31-Mar-12, 2 planes has been transferred to Scoot. From 31-Jan-2007 to the latest data as of 30-Jun-2012, there has been an increase in total number of aircraft from 128 to 156, representing a 20% increase.

Figure 3 - Number of Checks Performed by SIAEC

Digging into the 11 years data, I have compiled the number of checks performed by SIAEC as well as its maintenance and overhaul revenue. I have also highlighted recessionary year in orange - namely 2001 9/11, 2003 SARS and 2008 GFC. For FY 2007/2008,  there is a revised maintenance schedule that extend the interval between each check, creating a drop in A check for 2007/2008. From the table, we can easily deduce that a normal financial crisis is not enough a dampener for SIAEC as revenue manages to hold on well. However, a greater aviation crisis like SARS is able to reduce its revenue by 20%. One point to note is that as customers are charged based on man-hour, an "A" check revenue is not equal to that of a "C" check or "D" check. Depending on the extent of check, an "A" check requires 500-1000 man-hours as compared to 1000-8000 for "C" check and 20,000-50,000 for a "D" check. 

Line Maintenance and Technical Ground Handling

For line maintenance, its job is to "release certification, such as aircraft transit checks, night-stop checks and rectification of defects as well as maintenance and repair of aircraft radio systems, navigation and
communication systems, radar and cabin management interactive video systems". SIAEC's main task is to ensure that the aircraft has done all relevant checks before they are issued with the airworthiness certification.   

For technical ground handling, they provide services "such as push-back and towing of aircraft, water and lavatory servicing and the provision of aircraft ground support equipment". To sum up, this division is highly correlated with the number of flights received by Changi Airport as the higher the number of flight, the higher the revenue is. SIAEC has approximately 80% market share in Changi Airport Singapore.

This division also enjoys a high profit margin of 20% as noted earlier as a result of the low expenses involved. For Repair and Overhaul, material cost and equipment depreciation are involved resulting in a much lower profit margin. However, for line maintenance, it is relatively asset-light and fees are charged based on a flat fee per flight handled basis with the bulk of the cost being manpower.

Figure 4 - Flights handled by SIAEC at Changi Airport

Just as how the number of departure flights have increased over the years, number of flights handled by SIAEC has also shown a similar trend. Revenue is also correlated with the number of flights being handled. Hence, this division will be in sync with future growth in air traffic at Changi Airport, especially with the ASEAN Open Skies agreement in 2015 where traffic is expected to expand by at least 5% per year. Air traffic is relatively stable apart from the 2003 SARS where there is a 25% drop in revenue as a result of a drop in number of flights handled. 

To conclude, both of SIAEC's core operations are relatively stable even during a normal recession. Should a crisis like SARS occur once again, we can then expect some significant drop in revenue at a range of 20-30%. The line maintenance business also have a chance to grow in line with the air traffic at Changi Airport. However, SIAEC has a huge proportion of earnings coming from its investment, associates and JV, which we cannot overlook.

Investments, Associates and Joint Ventures

Not willing to be solely dependent on Singapore's air traffic for growth, SIAEC has been constantly seeking growth through external partnership. Its external partnership strategy is a two-pronged approach where it partners with well-known high-tech OEM to build its expertise as well as seeking overseas partner to start line maintenance business to grow its revenue base.

Figure 5 - Joint Venture with OEM

It has always been part of the strategy to invest in a joint venture with established OEM to expand the breadth and depth of their services. Not only will they get an increase in revenue, SIAEC will also be able to provide better technical expertise for its MRO customers. Partners can also benefit from the customer base of SIAEC in Singapore. 

Some of the major partners involved are like Rolls-Royce and Pratt & Whitney which are 2 of the 3 largest aero-engine manufacturers. A wide range of repair services are also provided like hydraulic pump, thermal coating, engines, fuel accessory, turbine, aircraft cabin, landing gear, compressor and avionics. These services help SIAEC to market itself as a one-stop service contractor that can take care of all needs.

Figure 6 - Line Maintenance Joint Venture

 While SIAEC have joint venture  in Pan Asia Pacific Aviation Services and PT JAS Aero-Engineering Services, they seemed to have adopted a new strategy ever since the joint venture of Aviation Partnership (Philippines) Corporation was formed in 2005. The strategy has been to make use of line maintenance activities which require lower capital expenditure and start-up time to expand into repair and overhaul services at a later stage. The line maintenance partnership will allow them to forge a critical mass of customer base and business volume.

After the partnership with Cebu Pacific Air in Philippines, SIA Engineering (Philippines) commences operation in 2009 becoming their first overseas based heavy maintenance facility. In 2007, SIAEC acquired Aircraft Maintenance Services Australia (AMSA) which offers line maintenance services in Sydney, Brisbane, Coolangatta, Melbourne, Adelaide and Perth. After the success in Philippines, SIAEC went on to establish Southern Airports Aircraft Maintenance Services (SAAM) with Southern Airports Corporation. Having commenced operation in late 2010, there has been plan to expand to other airports in Vietnam and to scale up operations to provide heavy maintenance.

To conclude, SIA Engineering will be a better way to take advantage of growing air traffic rather than SIA which is subjected to fuel cost, higher capex and more intense competition. While its resilience is respectable, expect some decline in both top-line and bottom-line during a global epidemic on the scale of SARS. There has also been signs that they are seeking to expand beyond their stronghold in Singapore to countries like Philippines, Vietnam, USA and Indonesia. Meanwhile, shareholders can benefit from the slow and steady growth in air travel industry in Singapore with our 2 IRs, F1 and other events.

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.