Posted by: donmihaihai | July 4, 2015

Some thoughts 4 July 2015

The article in this weekend The Edge Singapore confirmed my view that new is not always good especially in aerospace MRO. Nope I have not been reading ST Engineering or SIA Engineering nor went through their number in details. But this does not stop me from understanding and forming opinions in this industry.

Aerospace industry is pretty simple. People travel more yearly and more goods will travel in the sky. This mean more airplanes. Who is/are the winner? Of course that few airplane manufacturers. Airlines have never benefits from it except a few LLCs but if the increased in LLCs are faster than traveler then LLC will not be of exception of competition.

Companies like ST Engineering and SIA Engineering operate in the backend or workshop of air travel/ airplane. With increasing airplanes flying in the sky, their future are bright especially with a sizable market shares and I assume working toward better than today. Airplane Manufacturers will come out with new model and the players who are able to service these new model usually belong to the existing players doing a good job for current model.

But there is a twist! New model does not mean higher profitability. These MRO are working like clock work in the current model which produce those profitability. New model mean start again. Maybe not to zero but getting to clock work required time and effort and available plane. Next, Airline does not like MRO but the plane need it. Manufacturers want to produce more planes, with buyer coming back for expensive components and new model to repeat the cycle. It doesn’t want old plane flying in the sky that does not produce much to bottom line and risk of another crash that hurt their reputation. Which mean MRO is getting the stick!

ST Engineering and SIA Engineering, I assumed are the better players will fight it by doing the job better, offer more for the same thing and most likely do pretty good as well. Investor should so ok as long as the price is right.

SIA Engineering is a good lesson on extrapolation. Few years back, there were few expressing opinion in the internet on the impressive upward movement in profit and dividends from associates and JV which base on the historically look very likely to  continue and produce impressive growth for the company. I disagreed. And now the trend stopped. Extrapolation does not tell us that trend is illogically. If its continue, these associates and JVs will be the best companies in the world that require little or even negative equity. Trees can’t grow into the sky.

Other than extrapolation, there are many other ratios are in fact not so useful when use wrongly or even if two are use together. Ratio must use right with good understanding. One good example is debt/equity and interest coverage. WB recently talk about interest coverage of BNSF. Why BNSF and not BH level? Because most likely BH will not be helping. If this is the case, which debt/equity should we be looking at BNSF or BH?

And this go back to my current favourite Jardine C & C. Exclude financial services company – Low Debt/equity, even lower net debt/equity. Interest coverage is about 20X. Include non controlling interest, equity stood at USD10.8B. With rock solid B/S and cash generating businesses, why there is a need for right issue just because Jardine C&C is buying an investment at around USD0.6B? Cash on B/S is over a Billion USD. The Debt/equity does not tell us that tell us that Jardine C&C is a conglomerate with listed subsidiary and associates. Majority of businesses, assets and liabilities belong to its listed subsidiary Astra which is another conglomerate by itself. Segment information say Jardine C&C equity exclude Astra stood at USD382.5M and net cash of USD60M.

Astra with its huge businesses and B/S will not be funding its immediate holding company Jardine C&C because of the simple facts that shareholders of the remaining 49.9% not owned by Jardine C&C will not allow it to do so. Debts taken for this investment has to be served by Jardine C&C unlisted subsidiaries profit and dividends from non wholly owned subsidiaries, associates and investments. Debt/equity and interest coverage don’t tell you this.

Another time.


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