Financial Analysis Of ST Aerospace Dissertation Examples
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The main driving force behind the growth of the MRO industry is air transport. The airline industry witnessed a decline of approximately 1% in the year 2010, which is due to high fuel prices and increase in long haul WB traffic. This causes a negative multiplied negative effect on the MRO industry and it witnessed a decline of approximately 7.5%.
The oil prices cannot be considered as the wild card by the airline industry. Oil prices are volatile and cascade a great impact on the cost incurred by the airlines. In 2011, the oil prices were recorded to be more than $100/bbl. The fuel cost make up approximately 30% of the total operating cost of the airlines. The airlines cannot control or forecast the oil prices. In 2011, it was forecasted that the oil prices were to rise to maximum $96/bbl.; but the oil prices rose up to $111/bbl. instead. In bid of controlling cost, oil prices have remained as a key area of concern for the airlines.
The North America and Western Europe has the largest markets of fleets and expansion of MRO markets. Companies operating in the MRO business are left with very little room for expansion in these regions. The emerging markets for MRO business resides in Asia (China and India) and Eastern Europe regions. However, these emerging markets represent only a fraction of the entire market share, even with their rapid growth rate. According to PWC (2008), the MRO market in India is expected to reach approximately US$2.6 billion by the year 2020.
The manpower cost in India is low. It has also high availability of the skilled labour. The manpower cost rate for MRO business in India stands at approximately US$30-35 per hour. This is nearly 60% lower than the manpower cost incurred in United States and Western Europe. India has as a great potential for MRO industry.
Additionally, India lies at a strategic location geographically between the regions of Asia Pacific and Europe. With this advantage, the domestic airlines can garner profits by establishing MRO facilities in the country. Also, the international airline carriers can get their airlines services or repaired in India during their stoppage (as more international airline carriers are entering the Indian market) and leverage the cost advantage as compared to get these services in USA or Europe. There are only a handful of the Indian companies in the MRO business, which include HAMCO (Hyderabad Aircraft Maintenance Company), GMR Group, Max Aerospace and Aerospace Limited, and Air Works India Engineering Pt. International MRO players have foreseen this comparative advantage and has since been entering the market through strategic joint ventures such as EADS (European Aeronautic Defence & Space Co NV).
The global GDP output for India has been decreasing over the years. This was mostly attributed to recession and economic downturn. In 2011, it was fell 0.75% lower as compared to 2010. According to IATA (2011), the biggest risk which the airlines and consecutively the MRO industry faced was the economic crisis in European Union (2011-12). The North American airlines, the main contributor to MRO revenue, was affected by to the weakening market and economic conditions of European countries. The European crisis subsequently cascade into a ripple effect that lead to economic weakness across the globe in the current global business scenario.
The Indian subcontinent thus, presents a vast market opportunity for the expansion of the MRO market at large scale, because of various factors including the cost arbitrage in the manpower, the geographical advantage, and expected high growth rate of aerospace industry which is a major driver of the growth of the MRO industry.
The airframe OEMs, as elaborated earlier uses advanced technology to reduce their costs incurred in MRO. There is an observed irony that although the average airframe cost (line maintenance unit costs) is declining; the engine maintenance cost is on the rise. The component costs incurred in component MRO is on a decline because of the more prevalent incorporation of the advance technology components and along with more current software used. The Heavy Maintenance Visit (HMV) frequencies for aircraft have since declined by approximately 50%. This was mainly due to delays in average maintenance cycle from the past 4-6 year’s cycle to the present of 8-12 years maintenance cycle.
There are various significant drivers of change in the MRO industry. The change in the fleet is the sole driver of an increase in the maintenance cost by approximately 3.2%.The main contributor is attributed to the cost of renewal of the fleet. Due to the current boom in the airline industry, there is an increase in utilisation of the aircraft, which is a key driver for the growth of the MRO market. It was observed that there is an increase in utilization rate of approximately 1.5% in a year, which in turn drives the MRO market towards a growth rate of nearly 0.4% in a year. The growth witnessed in the engine maintenance drove the MRO industry growth or revenue by a significant annual spike of nearly 6.4%. The gradual decrease witnessed along with the increase in the components and line maintenance, accounted for a small increase in the revenue of the MRO by approximately 0.1%. The labour costs are easing out and indirectly impacting the bottom line of the MRO revenue.
There is potential growth of the fleets in the long term in near future due to the increasing income level, decreasing income inequality, and the emerging market. This growth in the air travel is being driven by the approximation that the middle class across the globe is growing along with the growing population. The growth recorded in the fleet in 2010-2011 was 2.7% Compound Annual Growth Rate and the number of fleets increased from 19,675 to 20,203. With an expected fleet growth rate of 3.5% Compound Annual Growth Rate, the number of fleets in 2021 is expected to be approximately 28,591, with Airbus and Boeing having the largest market share in the airframe OEM industry.
Source: Team Sai Consulting
The engine MRO contributes to the high growth rate. The MRO industry is expected to grow up to $69.0 billion by 2021 with a growth rate of approximately 3.5-3.9 Compound Annual Growth Rate. The market share of Europe (Eastern and Western Europe) in the MRO industry is expected to grow from 29% in 2011 to 30% in 2021 at a Compound Annual Growth Rate of nearly 4.7%. The market share of the Asia (Asia Pacific, India, and China) in the MRO industry is expected to grow from 25% in 2011 to 30% in 2021 at a Compound Annual Growth Rate of nearly 6.8% and reach revenue of approximately $20 billion in 2021 from the $11.6 billion in 2011.
The GDPPC (Gross Domestic Product per Capita) drives the growth in the middle class of the economy. This in turn indirectly drives the growth in the air travel which consequently drives the demand in the MRO industry as discussed above. The recovery in the economy is boosting a much needed confidence in the airlines to devise plans on a long term plan. The industry is witnessing the tightening of the engine and hangar supplies; but on the other hand this positive impact which is being created by the capacity discipline can be hampered due to the rising oil prices.
While the emerging markets poses great opportunities for the airframe business with the addition of new fleets in the market, the impact on the MRO industry can be delayed. This delay is attributed to the new advanced technology used in the new fleets which require lesser maintenance and enjoy a honeymoon from maintenance for a long duration. Thus, leading and driving positive growth can take few years and thus delay the impact. India and China display the greatest opportunity in the Asian market for the airframe and MRO industry. They are nearly equivalent to the market presented by the rest of the countries in Asia. The Middle East market is also growing at a comparable rate to the Asian market. Although the fleet size of the Middle East is nearly of the same size of that present in the African market, the growth observed is not similar. MRO market of Middle East is double the size of the MRO market of Africa. And according to IATA, in near future, this market gap in the MRO is expected to widen.
This section will discuss the financial status of the company in terms of their income statement, balance sheet, cash flow, different financial ratios, profitability, margin analysis, credit ratios, annual growth rate, asset turnover, long-term solvency, and a snapshot of the stock market.
The financial report for ST Aerospace in 2014 is yet to be released. The analysis takes reference mainly on the financial report in 2013 and progressive financial results released for 2014.
Revenue is recognized when the measurable economic benefits is reaped by the company. It is measured after weighing the received or receivable, net of any returns, trade discounts and volume rebates.
It is evident from the income statement that the revenue of ST Aerospace has seen a growth from the year 2012 to 2013 by 3.08%. The cost of sales have also increased from the year 2012 to 2013 by 3.12%. Thus, the growth in revenue was slightly lower than the cost incurred in the sales. The gross profit also saw an increase from year 2012 to 2013 by 2.9%
PBT by Business Group
Based on the latest financial result, comparing 2014 with 2013, only AMM group saw an increase in the PBT component. This increase is not significant with an increase of approximately $1milion. The other subsidiary in the CERO and EMS group are experiencing a decrease in the PBT component. This resulted in a drop in the PBT per revenue from 15% (in 2013) to 14% (in 2014).
The above shows the revenue change between the subsidiaries of ST Aerospace. Majority of the subsidiaries in the AMM group saw an increase in revenue as compared to 2013, with the exception of MAE, SAA and STAG. MAE (Madrid), SAA (San Antonio) and STAG (China) are facing a decrease in revenue. CERO and EMS groups are seeing a decrease in the revenue as compared to 2013. This could be due to economic downturn in 2014 and also that steep competition is faced in these group between other MROs that offer engine or component services and competition from OEMs.
For STAS, there is a good will component of $1.2million. Goodwill is an intangible asset that represent the excess of a fair value of the consideration transferred, the recognised amount of any non-controlling interests in the acquisition and also if the business combination is achieved in stages, the fair value of the equity interest in the acquire, over the net recognised amount of the identifiable asset acquired and liabilities assumed. In this case, the excess is negative, a bargain purchase gain is recognised in loss. It is initially used to measure at cost. Following the fulfilment of the initial recognition, it is measured as cost less any accumulated impairment losses.
Profit before tax percentage is calculated based on a company's earnings before tax as a percentage of total sales or revenues. Comparing the PBT in percentage, it can be seen that on the whole, there is a general decrease in CERO and EMS in 2013 as compared to 2012. Only AMM shows an increase of 3%. Based on the 9 month measurement in 2014 as compared to 2013, PBT% is stagnant for the AMM group. For the CERO and EMS group there is a decrease of 3.4% and 3.9% respectively. This brings down the Aerospace sector percentage by 1.5%. The outlook of 2014 for ST Aerospace is worse off as compared to 2013. It shows a gradual 3 year decline in profit before tax percentage. This could be mainly attributed to investments, global economic condition and also competition from other MROs and OEMs.
The profits reaped before tax on the whole decrease by $21.6m, with AMM and EMS having a decrease of $49.5m and $1.7m respectively. CERO is the only group that increased $29.6m.
Revenue by business group
A 9 month comparison between 2014 and 2013, shows an increase of $18m as whole. AMM and EMS has an increase in revenue, only CERO group has a $26m decrease in revenue
All subsidiaries in the AMM group shows increase in revenue. Only MAE has a decrease in revenue by $26m. CERO group was pulled down by STAS (negative $55m) and STA Rotables (negative $4m). EDC was the subsidiary that was reaping negative revenue in EMS group.
Source: ST Engineering Ltd. Annual report.
The balance sheet presented above represents ST Aerospace’s financial position owing to the assets and liabilities of the organization. As of 2013 its total assets grew from $1.1 million worth in 2912 to $2.7 million. At the same time, the liabilities of the company also grew from $902 655 in 2012 to $2.4 million in 2013. The implication of this growth is such that the financial assets of the company are growing although its liabilities are as well caching up at a fast rate as well.
Statement of Cash flow
ST Aerospace’s net cash used in investing activities of $141.534m in FY2013 was higher than that of FY2012 by $100,639m. The higher cash outflow was mainly attributable to lower proceeds from sale and also from Maturity of investments as well as higher cash outflow for new investments in Aerospace sector and purchase of property, plant and equipment, but these were partially offset by lower cash Outflow for the purchase of investments.
Financial Highlights- Aerospace
As a comparison of the revenue contribution by business sector in FY 2013 as to FY2012, customer type and geography was largely the same. ST Aerospace makes up 31% for the total revenue for ST Engineering. Of which, 62% of the total group revenue was from commercial business and sales from defense customers made up the remaining 38%. Based on geographical location of the ST Engineering entities, it has strong revenue contribution from Asia at 72% and US entities accounted for 25% of Group revenue. In 2013, the exposure to Eurozone remained low.
ST Aerospace is stable and has returned revenues of $2.08b, which is broadly equivalent to what was reported for FY2012. This result demonstrates that the Aerospace sector is resilient while it adapts to the challenging aviation landscape. In 2013, it sustained growth and secured new orders worth $2.3b. The company’s capacity to maintain profitability is one of its strengths although sustaining the trend seems a task to consider given that the entry of competitors into the market in the near future may lead to sharing out of the profits realized in the entire industry.
Revenue of $2,079m for FY2013 was comparable to that
In FY2012, the Aircraft Maintenance & Modification (AMM) group displays a higher revenue. Although with completion of project milestone in the Engineering & Material Services (EMS) group, it was offset by lower sales in the components division of the Component/Engine Repair & Overhaul (CERO) group. In FY2013, PBT stands at $319.4m, with a growth of 7% or $2.6m in revenue over that reported in FY2012. The increase in PBT was attributed to higher gross profit, lower operating expenses and favorable foreign exchange impact. But it was partially offset by the absence of a one-off gain on disposal of a property and write-back of allowance for inventory obsolescence, which was recognized in FY2012.
Total asset increase is due to the increase in associates and jointly controlled entities. It was mainly due to investment in Elbe Flugzeugwerke GmbH. The increase in intangible assets was attributable to the acquisition of intellectual property assets in Eco Services, LLC (51% ST Aero owned) and the component license agreements signed with UTC Aerospace Systems in the Aerospace sector.
There were capital expenditure, which was due to purchases of rotable components. This strategic purchase is to support the growth in MBHTM programs and investments in an aviation center located at Seletar Aerospace Park (Singapore).
There are several components of firm’s profitability:
Firm effect- persistent firm specific component, mainly from the business unit but also form the parent company. ST Aerospace is constantly aware of the trends of the aerospace industry. Any market changes, will mean there must be change in firm strategy. For example, if airlines are buying more of a certain aircraft, ST Aerospace will have to attain the capability of maintaining that aircraft.
Cyclical effect: There is a fixed cyclical effect when it comes to aircraft maintenance. There are specific maintenance cycle to be conducted when the aircraft were to reach certain flight cycle or flight hours. This is purely determined by the flying pattern of the airline. Hence, ST Aerospace will have to anticipate this changes to ensure that there is continuous work in the company. There are also certain lull period in the aircraft maintenance period. For example, when it comes to the end of the year, airlines will be flying the aircraft more for the festive season and school holidays (e.g., Christmas). This is purely due to the increase in air travel demand. Hence, airlines will not be ground the aircraft for it to be serviced. They will usually defer the maintenance until January of the following year. This will cause a spike in aircraft maintenance during the early part of the year. It is also seen that during the summer break, the airlines are having more flight than usual. Hence, there will be less work during this time.
For the RSAF, national day of Singapore falls on 9th of August, aircraft must be ready to for flight during that time. This is to ensure that all aircraft are operationally ready for flight performance
During that time. Aircraft/ engine maintenance will usually be more during the few months before august.
Random component: This is especially true when OEMs or other airlines faced certain design or manufacturing problems. OEMs will issue SBs to overcome these problems. The often problem faced is that certain part faced premature failure. Hence, during this time, there will be random spikes for maintenance jobs.
Mergers & Acquisition
In order to keep up with technology advancement and market trends, it seeks to grow its businesses is the acquisition of business entities and operating assets or joint ventures. On 17th May 2012, ST Aerospace acquired 50.1% of Eco Services, LLC (“Eco Services”) for a cash consideration of $24,820,000. Eco Services specializes in the provision of engine wash services. On 31 December 2012, it acquired 100% of Volant Aerospace, LLC (“Volant”) for a cash consideration of $22,094,000. Volant provides new and refurbished interior parts, support services and aircraft interior configuration services.
In face of the volatility situation faced in 2013, ST Aerospace successfully made investments that helped in securing a sustainable competitive advantage. The investments of ST Aerospace was $77m higher at $382m for the year compared to $305m for FY2012. A large portion was amortized towards the purchase of aircraft component rotables and the construction of a new hangar as well as an aviation center.
Most of the acquisitions are considered as “bolt-ons” that will strengthen the competitiveness of the present businesses. The acquisition of Turbo Mach in San Antonio, Texas, a designer and manufacturer of composite components and assemblies is a good example of such acquisition. This strategic move is to enable ST Aerospace to be able to strengthen its manufacture and repair capabilities to be able to support existing/next generation of aircraft to enhance its MRO competitiveness.
A 90% equity stake in Technicae Projetos e Servicos Automotivos Ltd that provides automotive MRO services to military customers. This is in bid of strengthening competiveness in the defense business in South America. There is also a 35% equity interest in Elbe Flugzeugwerke, following receipt of regulatory approvals and fulfilment of customary conditions precedent.
Joint venture was also set-up to enable investment in mid-life and end-of-life aircraft leasing. Aircraft leasing business is expected to grow. In 2012, the aircraft leasing industry was approximately US$180b in asset value, where about 35% of the global fleet on operating lease. By 2020, it is anticipated that the share of leased versus owned aircraft is predicted to grow to 50%, due to strong demand from low-cost carriers and legacy airlines in bid to attain financing diversification and fleet flexibility. ST Aerospace has the technical capability to value-add in mid-life and end-of-life aircraft leasing, which will allow minimum aircraft transition costs between leases.
ST Aerospace takes after ST Engineering’s vision to work towards building symbiotic relationships with customers. The key primary focus is to help customers be more effective and to be able to deliver results that exceed customer’s expectation. ST Aerospace views it as a partnership with its customers. In order to create more value added service to the customer, ST Engineering invest in innovative projects that fuel productivity and innovation and eventually drive business expansion. This in turns provides a meaningful and fruitful career for the 23,000 staff globally. With the size and scale of staff in ST Engineering, it is able to tap on the diversity, breadth and depth of capabilities of the staff. ST Engineering relentlessly seek out and discover ways to work smarter. The key to sustainability is to be adaptable and flexible. This is especially critical during new market ventures, where competition intensifies as industries consolidate. The key is to integrate business conduct, environmental, health and safety activities remain a pertinent driver for ST Engineering. It believes in going beyond profits.
Customers dictates the company’s success by extending its market reach. Hence, there is a pertinent need to increase the levels of satisfaction through value creation, quality products and systems and exemplary services. It strives to build strong Relationships with the customer, by ensuring there is continuous improvement in terms of delivery of quality products and services.
Customer Excellence Committee is formed to steer the customer excellence efforts to establish a framework to foster a customer-centric culture that inculcates a ‘customer first’ mindset and to promote and share good practices in:
• Learning and listening strategies: Through participation in local and international forums, exhibitions, trade shows, conferences.
• Customer relationship management: Building of trust, confidence and customer loyalty through anticipation of customer’s needs and establishing long term relationships.
• Benchmarking of performance: Both internally and with industry leaders for continuous improvement purposes
• Customer satisfaction measurement across business sectors: Through inculcation of customer centric culture by providing courses to employees to raise EQ (Emotion Quotient) of staff.
Multiple key performance indicators were identified to monitor, evaluate and improve customer satisfaction. The business sectors will conduct an annual customer satisfaction survey rating based on the following criteria: the quality, delivery, responsiveness, service levels and value for money of products and services. In 2013, ST Engineering achieved 98%customer satisfaction.
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