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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 14 Nov 2019, 4:47 PM

 

SIA Engineering - Renewed Optimism on Privatisation

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  • SIA Engineering's share price spike seems to indicate possibility of privatisation by parent Singapore Airlines (SIA, SGX:C6L).
  • This is in line with the recent spurt of M&A/privatisation activities in Singapore.
  • Singapore Airlines has enough firepower to effect the deal.
  • Upgrade to BUY with higher Target Price of S$3.01, which factors in privatisation premium.

Upgrade to BUY in View of Privatisation Potential

  • We believe SIA ENGINEERING CO LTD (SGX:S59) could be back in focus as a potential privatisation target. As discussed in our recent Group Research report “Spotlight on M&A”, M&A and privatisation trends are revving up in the Singapore equity market of late. YTD in 2019, more than 10 companies have been privatised or are in the process of being bought out.
  • Given SIA Engineering’s rather uninspiring stock price performance over the last 12 months (down by about 20% to S$2.51, before today’s sharp rise), parent Singapore Airlines could thus view current valuations as attractive for privatisation.
  • The rationale for privatisation is also pretty strong, in our view, as Singapore Airlines currently has close to a 78% stake in its MRO unit, and the benefits of keeping SIA Engineering listed is not entirely apparent, given the low liquidity of the stock.
  • Moreover, SIA Engineering does not really need to tap the equity capital markets for financing as it is a cash rich company, and does not have significant acquisitions under its belt. Singapore Airlines would only need to fork out S$748m for the privatisation, and this would not affect its gearing too materially while being mildly earnings accretive.

Where We Differ

  • Current valuations for SIA Engineering are at multi-year lows at about 17x forward PE and dividend yield is healthy at close to 4.5%. Hence, downside risks are limited even if the privatisation does not materialise. The stock is currently trading cum-dividend with an 8-Sct final dividend for FY19 to be paid out later in July. See SIA Engineering's dividend history.

Potential Catalyst

  • Potential exercise by parent Singapore could be the key near-term Otherwise upside investments in outright, which offer immediate to.

What's New - Potential Corporate Activity in the Offing?

Privatisation chances back in focus.

  • SIA Engineering's share price rose by today on high closing at S$2. The the stock was uncharacteristically high, which we fuelled by renewed talks of parent Singapore Airlines.
  • As discussed in our Group Spotlight on M&A, M&A and privatisation back in the spotlight in market of late 2019, more 10 companies been privatised are in of being out.

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

  • Over the SIA Engineering's share price has down to sharp rise. This largely a uninspiring and lower to challenging operating conditions its core heavy maintenance structural industry.

Rationale for Privatisation Is Pretty Strong

  • Singapore Airlines currently has close to a 78% stake in its MRO unit, and the benefits of keeping SIA Engineering listed is not entirely apparent, given the low liquidity of the stock. Moreover, SIA Engineering does not really need to tap the equity capital markets for financing as it is a cash rich company, and does not have significant acquisitions under its belt.
  • The company’s operating results have also not been exciting of late, and returns to minority shareholders have thus been poor, with dividends falling y-o-y.

There Are Some Advantages of Remaining Listed Though

  • The separately listed status of SIA Engineering does provide it with an aura of independence. It can be argued that it is important for SIA Engineering to retain the perception of being an independent MRO provider as it has to bid for work from other airlines in addition to parent airline jobs. Roughly 40% of SIA Engineering’s revenue is driven by non-Singapore Airlines customers.
  • But the question remains on how independent the market perceives it to be and whether it can continue to secure work solely on to its superior capabilities and facilities despite its parent airline affiliation.

Pros and Cons of SIA Engineering Retaining Listed Status

Pros

  • Perception of independence from parent airline group important to win third-party MRO work.
  • Retains ability to tap markets for future investments needed to survive in changing MRO landscape.

Cons

  • Low free float and low trading liquidity.
  • Absence of capital market transactions since listing.
  • Have to incur listing-related costs.
  • Loss of dividends to minority shareholders.

At What Price Would a Privatisation be Likely to Happen?

  • Based on our compiled data, companies that were privatised or delisted in the last three years were transacted at an average premium of about 15% over their last transacted price before the deal was announced.
  • For deals announced in 2019, that average premium is around 20%. This premium is necessary to entice minority shareholders to liquidate and realise their entire investment, and it will depend on equity market conditions or the presence of alternative exit options for minority shareholders.
  • For large-cap counters, we have recently seen privatisation premiums of 26% offered for M1 and a similar 26% offered for INDOFOOD AGRI RESOURCES LTD. (SGX:5JS). The most recent privatisation offer in the Singapore market, for steel trading company Hupsteel, involves a whopping 52% premium, which we believe is unlikely to materialise for SIA Engineering.
  • Our best estimate is that the premium would be roughly 10-30% above last close, which would imply an offer price of between S$2.75 and S$3.26 per share.

Upgrade SIA Engineering to BUY, Based on M&A/privatisation Premium

  • We have been highlighting the possibility of SIA Engineering's share price benefitting from either a merger scenario with Singapore-based peer ST Aerospace or privatisation by parent Singapore Airlines for a while (Details in our report “Sea of Change” dated 6 August 2015). This has been the key upside risk to our recent call on SIA Engineering and given that the possibility has re-emerged, we again impute a 20% privatisation premium in our Target Price, which is thus raised to S$3.01.
  • Current valuations for SIA Engineering are at multi-year lows at about 17x forward PE while dividend yield is healthy at close to 4.5%. Hence, downside risks are limited even if the privatisation does not materialise.

Source: DBS Research - 5 Jul 2019

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