Are SIA Engineering Company Limited (SGX:S59) Shareholders Getting A Good Deal?

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If you are currently a shareholder in SIA Engineering Company Limited (SGX:S59), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, SIA Engineering is currently valued at S$2.6b. I’ve analysed below, the health and outlook of SIA Engineering’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.

View our latest analysis for SIA Engineering

Is SIA Engineering generating enough cash?

Free cash flow (FCF) is the amount of cash SIA Engineering has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.

The two ways to assess whether SIA Engineering’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.

Along with a positive operating cash flow, SIA Engineering also generates a positive free cash flow. However, the yield of 1.15% is not sufficient to compensate for the level of risk investors are taking on. This is because SIA Engineering’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

Is SIA Engineering's yield sustainable?

Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at SIA Engineering’s expected operating cash flows. In the next couple of years, SIA Engineering’s operating cash flows is expected to grow by a double-digit 21%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of SIA Engineering’s operating cash flow in the past year, as well as the anticipated level going forward.

	Current	+1 year	+2 year
Operating Cash Flow (OCF)	S$78m	S$94m	S$95m
OCF Growth Year-On-Year		20%	0.4%
OCF Growth From Current Year			21%

Next Steps:

Given a low free cash flow yield, on the basis of cash, SIA Engineering becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research SIA Engineering to get a more holistic view of the company by looking at:

1. Valuation: What is S59 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether S59 is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on SIA Engineering’s board and the CEO’s back ground.
3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.