According to World Bank’s data (
Read more here),
the air transport passenger grew almost five times in the past thirty
years.
The total passenger in 1986 and
2016 were 0.8 billion and 3.7 billion respectively.
The compounded annual growth rate was 5.1%.
See below chart for details.
This was underpinned by world stronger economy growth and
cheaper air travelling cost.
People are
willing to spend more on vacation travelling around the world.
The international world tourist arrival hit
1.24 billion in 2016 (
Read more here), see below
chart for details.
Moving forward, the air travel outlook is forecasted to be growing
at 2.7% to 5.7% annually upto year 2036, as depicted by the following chart.
Industries that are benefited from the travel boom include
tourism, airlines, airport and aerospace engineering. Although tourism operators and airlines
markets are growing, competition among them is stiff (
Read more here). The market will undergo consolidation via
merger and acquisition before it could achieve new equilibrium for growth. For airport operators, they are regulated
heavily by authority. As such, the
income stream will be difficult to predict given the recent changes of
political landscape in many countries. Hence, aerospace engineering companies are relatively less volatile as
it is dominated by two large international players.
In Malaysia, there are few companies that involved in
aerospace engineering such as SAM, Kobay, Texchem, T7 Global, JHM and others. Among the above list, only SAM derives its
major chunk of revenue from the aerospace engineering segment, which
contributed about 60% to its total revenue in FY2017. Meanwhile
Kobay’s aerospace engineering segment contributed about 20% to its revenue;
Texchem, T7 Global and JHM have less than 1% of aerospace engineering
contribution to their revenue, but they are actively expanding their aerospace
engineering capacity lately. As such,
this study will focus only on SAM.
SAM’s Profile
SAM Engineering & Equipment (M) Berhad (“SAM Malaysia”)
is a key player in precision machining, equipment integration and automation
solutions, primarily for the aerospace and equipment industries.
Listed on the Main Board of Bursa Malaysia, SAM Malaysia is
a subsidiary of Singapore Aerospace Manufacturing (SAM) Pte Ltd, a leading
manufacturer of critical aero-engine components whose clientele includes some
of the world’s major aviation players.
The following table shows the major shareholders of SAM.
The AlphaIndicator (
Read more here)
gave SAM an average score of 9, a rather good rating but since AlphaIndicator
is useful only when comparing among various companies, thus the score may not
have any significant meaning. Anyway, it
will be stated here for convention purpose.
The next step is to screen for potential financial manipulation
by using Beneish M-Score (
Read
more here).
The following
table shows the Beneish M-Score of SAM.
Ratio Component
|
Beneish M-Score
|
2018*
|
2017
|
DSRI
|
1.286507061
|
1.078304673
|
GMI
|
0.854792636
|
0.912826519
|
AQI
|
2.321155929
|
3.334740491
|
SGI
|
1.113062895
|
0.866704298
|
DEPI
|
1.26083027
|
1.29914754
|
SGAI
|
1.079260482
|
1.242004052
|
TATA
|
-0.052041742
|
0.008710172
|
LVGI
|
1.389254511
|
1.038488428
|
M-Score (fail if > -1.78)
|
-2.01
|
-1.61
|
* Based on 4th
Quarter Results Annoucement
SAM failed the Beneish M-Score test on 2017. A closer look into the M-Score components
revealed that the main culprit could be AQI (Asset Quality Index) score. The cash level of SAM is deteriorating since
2017. It was due to higher dividend
payout despite lower revenue on 2017.
The reason behind the higher dividend payout was the conversion of 39,567,728
ICULS into ordinary share. As such,
although the dividend per share of 2017 was lower than 2016, the total amount of
payout was higher. One explanation for
this move could be the low gearing position of SAM has taken, thus to attract
additional capital funding via equity, SAM has to maintain a decent dividend
per share to stay competitive. For now,
the risk of potential financial manipulation could be low. The next section will look into SAM’s
liquidity position and its capability to fund future growth.
|
2018*
|
2017
|
2016
|
2015
|
Debt to Equity Ratio **
|
0.04
|
0.00
|
0.01
|
0.03
|
Cash and Cash Equivalent (RM’000)
|
21,556
|
99,001
|
173,644
|
103,585
|
Return on Assets **
|
9.55%
|
7.51%
|
11.36%
|
7.29%
|
Return on Capital Employed (ROCE) **
|
15.27%
|
11.99%
|
15.54%
|
10.37%
|
Free Cash Flow to Total Capital
|
n/a
|
(9.84%)
|
16.89%
|
(1.66%)
|
CAPEX (RM’000)
|
134,307
|
82,641
|
24,425
|
5,401
|
Cash Flow from Operating Activities (RM’000)
|
97,160
|
37,822
|
99,430
|
(983)
|
Source: Dynaquest Sdn.
Bhd. STOCKBASE platform except * and **.
See “Notes” at the end of this article for Copyrights details.
* and ** are from
Bursa Market Place
The above table indicates that the cash position of SAM is
deteriorating. The cash generated from
operating activity is not sufficient to fund CAPEX and pay dividend. As such, the company is obtaining additional
funding via debt in 2018. Fortunately,
SAM still has ample of room to raise fund given that its low gearing
position. However, looking at the ROA
and ROCE, although it is pretty decent compare to other contract manufacturers,
it does not show any advantage for SAM to be in aerospace engineering sector. Thus, additional funding via debt could eat
into its profit, thus the management shall look into ways to improve their
margin if heavy CAPEX is required to continue growing in aerospace engineering
industry.
Given that the Free Cash Flow to Total Capital is negative,
the dividend payout for the foreseeable future could be stagnant. Hence, the Monte Carlo valuation model based
on P/E ratio, using three years projection is used for this analysis. The following assumptions are needed as input
into the Monte Carlo simulation model.
Total 3000 samples were used for this analysis.
Company
|
Avg. 5Y PE range*
|
Forecasted lowest EPS from 2019
– 21 (sen)
|
Highest EPS from 2019 -21
|
Average EPS growth (%)
|
SAM
|
9 – 17
|
45
|
CAGR 5%
|
3.9%
|
* Dynaquest Sdn. Bhd. STOCKBASE
platform. See “Notes” at the end of this
article for Copyrights details.
The following charts are the forecasted price range of SAM
based on the Monte Carlo method.
As at 8th June 2018 noon, SAM was trading at RM7.52,
which is close to the maximum forecasted price. The risk of adding SAM into investment portfolio is relatively high.
Disclaimer:
The above analysis does not imply any buy or sell recommendation. The
author disclaims all liabilities arising from any use of the information
contained in this article.
Disclosure: The author may have interest
in the stocks of the companies in this article.
Notes: The data are the property
of Dynaquest
Sdn. Bhd. It is subject to Intellectual Property Rights
and T&C. Do not reproduce without the consent from Dynaquest Sdn.
Bhd. (The author has signed a “Data Sharing Agreement” with Dynaquest
Sdn. Bhd., based on a “Data Sharing Fee”, to use the data from Dynaquest Sdn.
Bhd.’s STOCKBASE platform in this blog. The content of this blog in no
way represents the views or opinions of Dynaquest Sdn. Bhd.)
