SIA Engineering

SIA Engineering | Buy

Target price: S$3.31

Aug 1 close: S$3.01

CGS-CIMB, July 31

We think the 22 per cent decline in share price over the past 12 months has been due to SIA Engineering's (SIAEC) exclusion from the STI index since Aug 17 amid structural challenges in airframe MRO (maintenance, repair and overhaul). Now at 18 times 2019's price to earnings ratio (P/E), however, below its 7-year mean of 23 times, SIAEC is more palatable.

Over the longer term, we believe SIAEC is an event-driven stock, awaiting privatisation by SIA. We find very little reason for SIAEC to remain listed. The company has also established itself as a choice engine MRO given the longterm tie-ups with Rolls Royce (RR) and Pratt Whitney (PW), which make no difference whether or not it is a subsidiary of SIA, in our view.

We think SIA is unlikely to divest SIAEC as it remains a wingman for the airline's new generation aircraft expansion plan. The non-SIA revenue derived at JV/associate level of around S$2.6 billion and the technical knowhow sharing from RR and PW make it harder for SIA to untangle the relationship.

There is also no incentive for SIA to pare down its 80 per cent stake in SIAEC to share the income/dividend with SilkAir. Instead, if the valuation is right, we think SIA could consider taking SIAEC private to fully consolidate the profit and cash.

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