SINGAPORE (July 8): Could SIA Engineering (SIAEC) be the next local stock to be taken private by parent Singapore Airlines (SIA) given its recent share price volatility and heightened activity in the local M&A and privatisation space?
Before noon last Friday, SIAEC announced in a filing it was not aware of any information that might explain the jump in its share price over Thursday and Friday morning.
This was in response to an unusual price movement query from the Singapore Exchange (SGX) issued less than an hour after the market opened that morning.
On the last day of the week, shares in SIAEC had risen by 8.6% to hit a near 12-month high of 2.96 cents, before closing 21 cents higher at $2.72 with nearly 11 million shares traded.
In a report by DBS Group Research report which had previously highlighted the possibility of a merger with ST Engineering or a privatisation by its 78% owner, lead analyst Suvro Sarkar says the benefits of keeping SIAEC listed are few and far between.
This due to the low liquidity of the stock, weak results due to structural changes in the MRO (Maintenance, Repair and Overhaul) industry due to longer-lasting engines and airframes as well as falling dividends.
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For the full year ended March, SIAEC’s earnings fell 13.9% to $160.9 million while revenue was 6.8% lower at $1.02 billion, mainly on the back of a decline in airframe and fleet management revenue.
Given average premium of around 20% for privatisation and delisting deals announced in 2019 for large-cap counters, as well as privatisation premiums of 26% offered for M1 and 26% offered for Indo Agri-Resources, Suvro says best estimate is that the premium would be 10-30% above SIAEC’s last close, which would imply an offer price of between $2.75 and $3.26 per share.
Although SIAEC’s denial to SGX and channel checks suggest that privatisation may not be at hand, CGS-CIMB Research analyst Lim Siew Khee says SIA can conserve cash by taking the unit private, given 28 aircraft are due for delivery by end FY20F and total borrowings could double to $12.2 billion.
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In addition, SIA has more urgent problems to tackle including yield pressure for its long-haul flights, weakness in the cargo business, competition from Chinese carriers, and higher oil prices.
“A privatisation by SIA would be mildly positive for its earnings in the short term, though it may limit SIAEC’s growth in the long term. On the other hand, it would allow SIA time and room to restructure or streamline SIAEC as needed,” says Suvro of DBS which is upgrading SIAEC to ‘buy’ with a revised target price of $3.01, after factoring in privatisation premium of 20%.
Meanwhile, CIMB-CGS is maintaining SIAEC at ‘add’ with $3.11 target price, saying the privatisation angle has been priced into the sharp rise in its share price.
