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Broker's take: Maybank Kim Eng raises 'underappreciated' SIA Engineering to 'buy'

MAYBANK Kim Eng has upgraded its call on SIA Engineering (SIAEC) to "buy" with an unchanged target price of S$2.85, saying shares in the provider of aviation maintenance, repair and overhaul services were trading at attractive valuations.

As at 1.57pm, SIAEC was trading up two Singapore cents or 0.8 per cent at S$2.46, with around 278,000 shares changing hands.

On July 5, rumours of a possible privatisation of SIAEC by its parent, national carrier Singapore Airlines (SIA), sent its share price surging 8.4 per cent to close at S$2.72. 

In a report on Monday, Maybank Kim Eng analyst Neel Sinha said: "Market chatter over a possible privatisation of SIAEC has faded and consequently the stock has fallen 14 per cent in the past two months (as at Aug 30's close)."

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With no changes to the outlook of the company's operating fundamentals, the recent downtrend does not "justify this share price decline".

Mr Sinha said:"SIAEC’s franchise strengths are somewhat underappreciated we believe. We expect Singapore Changi to maintain its position as the leading aviation hub in South-east Asia."

SIAEC's maintenance, repair and overhaul (MRO) business has undergone structural changes, which have posed challenges, but the company's "cost control, service diversification and efficiency improvement initiatives are starting to show results".

It also has a strong market share in aviation maintenance which has held steady at around 78 per cent. This provides "scale advantages that we believe other operators will find hard to compete with," Mr Sinha said.

While the global economic slowdown and worries over US-China trade tensions have seen "soft" growth in flight frequency at Changi Airport, Maybank Kim Eng noted that SIAEC has showed resilience in past downturns. 

Another near-term issue is the grounding of SilkAir's six Boeing 737 MAX 8 planes, which could prolong the maintenance cycle for the rest of their fleets, said the broker.