UPDATE: SIA Engineering shares surge as much as 8 percent amid buyout speculation

A Singapore Airlines Scoot plane on the tarmac at Changi Airport in October 2018.A Singapore Airlines' Scoot plane at Changi Airport

This article was originally published Friday, 5 July 2019 at 14:43 SGT; it has since been updated to include comment from Singapore Airlines and comments from KGI and CIMB.

SIA Engineering’s shares surged for a second day, with the company saying it wasn’t aware of a reason for the move, but speculation has emerged that the aircraft maintenance operator could be taken private.

The stock climbed as high as S$2.96 Friday, or an 8.11 percent gain, before lowering to S$2.85, or up 4.78 percent, by 2:03 P.M. SGT. The stock also jumped 8.37 percent on Thursday.

In response to a query from SGX, SIA Engineering said Friday it wasn’t aware of any information not previously announced which could explain the trading, nor was it aware of any other possible explanation.

But in a research note on Friday, DBS analysts said the stock price spike could indicate the possibility parent Singapore Airlines might take the company private.

“SIA Engineering’s stock price has performed poorly of late, and could thus provide a value-for-money privatisation target for SIA,” DBS said, pointing to the shares’ around 20 percent decline over the past year.

In response to an emailed request for comment from Shenton Wire, a Singapore Airlines spokesperson said, “We do not comment on market speculation.”

SIA currently holds around 78 percent of SIA Engineering, it noted.

“The benefit of keeping SIA Engineering listed is not entirely apparent, given the low liquidity of the stock,” DBS said. “Moreover, SIA Engineering does not really need to tap the equity capital markets for financing as it is a cash rich company, and does not have significant acquisitions under its belt.”

DBS estimated that to convince minority SIA Engineering shareholders to sell their shares, SIA would need to pay around 10-30 percent over the previous close, or about S$2.75 to S$3.26 a share.

At S$3.01 a share, it would cost SIA S$748 million to buy out the 22 percent of SIA Engineering it doesn’t already own, DBS estimated, adding the carrier has “enough firepower” for a deal.

However, DBS highlighted that the company may need the perception of being an independent MRO provider when it bids for work from other airlines. Around 40 percent of SIA Engineering’s revenue is from non-SIA customers, the note said.

DBS upgraded SIA Engineering shares to Buy from Hold and raised its target price to S$3.01 from S$2.60 on the expectation the company could be taken private.

Follow Shenton Wire on Telegram to receive alerts on your phone

“We have been highlighting the possibility of SIA Engineering’s share price benefiting from either a merger scenario with Singapore-based peer ST Aerospace or privatisation by parent SIA” since 2015, the DBS note said. The belief the possibility has reemerged led it to include a premium to its target price, DBS said.

But it added, even without a deal, the valuations for SIA Engineering’s shares are at multi-year lows of around 17 times forward price-to-earnings, with a nearly 4.5 percent dividend yield.

“Downside risks are limited even if the privatisation does not materialise,” DBS said.

Separately, CIMB Research said in a note that taking SIA Engineering private would be good for the share price, but was unlikely to cause the company to lose out on or gain customers as SIA is already the parent company.

CIMB added that such a move would be neutral for SIA, as the brokerage estimated a deal would move its net gearing up to 32 percent from 28 percent at the end of fiscal 2019.

KGI said the speculation made for a good short-term trade based on risk-reward, as SIA Engineering’s price-to-book valuation was at its lowest since 2009.

“We think a privatisation offer should easily be above S$3.00. If this doesn’t pan out, downside is mitigated by its 4.3 percent dividend yield,” KGI said in a note.

While you’re here, we’re hoping you can help us out.

Shenton Wire has been providing you with quick news and market analysis. But we need your support to continue to bring you the news you’ve come to expect and to expand our reach beyond Singapore.

Your monthly contribution will directly fund our journalism.

S$2     S$4       S$8

S$18       S$28       S$88

You can check your existing account here. You can also contact us about other contribution levels or for corporate subscriptions and syndication queries.