SIA Engineering share price jump sparks SGX query; analysts float possibility of privatisation

SIA Engineering said it is not aware of any information which might explain the jump in its share price over Thursday and Friday, in response to queries from the Singapore Exchange (SGX) for "unusual price and volume movements".

The SGX query came just half an hour after the market opened on Friday. Since then, SIA Engineering shares rose as high as S$2.955, up 23.5 Singapore cents or 8.6 per cent as at 11.24am. On Thursday, the counter closed 8.4 per cent or 21 Singapore cents higher at S$2.72 on high volume.

As at 12.01pm, the counter lost some of its morning gains to trade at S$2.81, up nine Singapore cents or 3.3 per cent.

The spike in SIA Engineering shares may indicate the possibility of privatisation by parent company Singapore Airlines (SIA), DBS analysts said on Friday morning in a research note before the SGX query was issued.

SIA said to The Business Times that it does not comment on market speculation, when asked about the DBS research report. Its own shares saw some upside in the early morning trading session, rising as high as 1.2 per cent or 11 Singapore cents to S$9.56 as at 11.38am. 

DBS analysts Paul Yong and Suvro Sarkar had called the stock's volatility "uncharacteristically high", which they believe could have been fuelled by renewed talk of privatisation by SIA.

"SIA Engineering's stock price has performed poorly of late, and could thus provide a value-for-money privatisation target for SIA," they said.

For the past 12 months, SIA Engineering's share price has trended down 20 per cent to S$2.51 prior to the sharp rise, on "uninspiring" quarterly results and lower dividend expectations, said the analysts.

With SIA's close to 78 per cent stake in SIA Engineering's maintenance, repair and operations (MRO) unit and the stock's low liquidity, the rationale for privatisation would be "pretty strong", DBS said.

In addition, SIA being a cash rich company means it would not have to leverage the equity capital markets for financing, along with not having any significant acquisitions under its belt.

However, remaining separately listed from SIA will give SIA Engineering an "aura of independence", important in retaining perception as an independent MRO provider, said the analysts. This is because it has to bid for work from other airlines, which currently accounts for around 40 per cent of its revenue.

Should the privatisation materialise, DBS is estimating a premium of around 10 to 30 per cent above the last closing price, translating to an offer price of between S$2.75 and S$3.26 per share.

DBS has thus upgraded SIA Engineering to "buy" based on the M&A or privatisation premium, with a raised target price of S$3.01. It said current valuations for the firm are at multi-year lows of about 16 times forward price-to-earnings, and dividend yield is healthy at close to 4.5 per cent. Downside risks are thus limited even if the privatisation does not materialise, it said.

DBS added that it would cost SIA S$748 million to privatise SIA Engineering at S$3.01 per share for remaining shares it does not already own, which is 22 per cent.

A privatisation would also buy more time for SIA to restructure or streamline SIA Engineering as needed.

For SIA's own earnings, privatisation can provide a marginal 1 per cent uplift to the airline's fiscal 2020 earnings, and two per cent to its fiscal 2021 earnings, assuming the cost of debt of 3 per cent and six months contribution in the financial year ending March 2020, said DBS.