Broker's take: Maybank Kim Eng upgrades SIA Engineering to 'buy' as growth risks are priced in

BROKERAGE Maybank Kim Eng has upgraded its call on mainboard-listed SIA Engineering to "buy", but lowered its target price for the stock from S$3.50 to S$3.00. The upgrade comes as negatives stemming from growth risks caused by structural changes in commercial aircraft maintenance, repair and overhaul (MRO) works are priced in, presenting value for investors.

In a research note, Maybank Kim Eng analyst Neel Sinha noted that SIA Engineering shares, which are hovering near nine-year lows, have been on a decline for the last 2.5 years due to the said growth concerns.

These were down to lower maintenance frequencies required by next-generation aircraft and fleet growth at low cost carriers (LCCs) requiring MROs to innovate solutions to reduce aircraft downtime at hangars.

That said, Mr Sinha believes "the adjustment process is close to its tail end". In addition, the medium-term outlook for global commercial aircraft fleet and passenger traffic also remains positive with LCCs driving growth, he said.

He added: "Although structural changes to the MRO business have posed various challenges, note SIA Engineering's maintenance market share at its Singapore home base has held steady at about 78 per cent over the past three years; scale advantages that we believe other operators will find hard to compete with."

The company has also been investing in new initiatives such as manufacturing technology for cabin interior parts and in-flight entertainment, among others.

Key risks to Maybank Kim Eng's view are that SIA Engineering's new initiatives might take beyond 12-18 months to contribute earnings and if adjustment process to lower MRO workload for new aircraft take longer than expected.

SIA Engineering shares were trading flat at S$2.49 as at 2.09pm.