Upgrade to BUY

• Market chatter over a possible privatisation of SIA Engineering (SGX:S59) has faded and consequently the stock has fallen 14% in the past two months. 1Q20 was in line with our expectations with core PATMI achieving 25% of our FY20 forecast.
• We see no change to our outlook for operating fundamentals to justify this share price decline.
• Our SGD2.85 Target Price is DCF based (unchanged 8% WACC; 2% TGR) and we upgrade rating to BUY from HOLD.

Franchise Strengths Somewhat Under-appreciated

• SIA Engineering’s franchise strengths are somewhat underappreciated we believe. We expect Singapore Changi to maintain its position as the leading aviation hub in Southeast Asia. And although structural changes to the MRO business have posed various challenges, SIA Engineering’s cost control, service diversification and efficiency improvement initiatives are starting to show results.
• SIA Engineering’s maintenance market share in home base Singapore has held steady at c78% in recent years providing scale advantages that we believe other operators will find hard to compete with.

Boeing, Traffic Growth Are the Key Near-term Issues

• YTD Singapore visitors/Changi flight frequency growth has been soft at 1.4%/(0.8%) given the economic slowdown in the region and business uncertainty with the US China trade war. However SIA Engineering has demonstrated resilience to such past downturns like 2014, demonstrating modest revenue growth despite contracting air traffic.
• Boeing is the other near-term issue; the grounding of six B737MAX and two B787—10 aircraft by customers Silkair and Singapore Airlines (SGX:C6L) may possibly prolong the maintenance cycle for rest of their fleets.

Valuations Are Interesting Again

Source: Maybank Kim Eng Research - 2 Sep 2019