SIA Engineering faced queries from the regulator yesterday after its shares shot up on the back of rumours that the firm would be bought out by majority shareholder Singapore Airlines (SIA).
The stock rose as much as 8.6 per cent during morning trade before a gradual drift back to close at $2.89, a rise of 6.25 per cent.
That spike followed an even greater increase on Thursday when the shares rocketed 8.4 per cent.
The Singapore Exchange (SGX) asked the firm early yesterday to explain the "unusual price and volume movements".
SIA Engineering responded that it was not aware of any information which might explain the price surge over Thursday and Friday.
The sharp increase may indicate the possibility of privatisation by parent company SIA, said DBS analysts yesterday, before the SGX query was issued. SIA said it does not comment on market speculation.
The rise in SIA Engineering's price when market closed yesterday. It rocketed 8.4 per cent on Thursday.
DBS analysts Paul Yong and Suvro Sarkar had called SIA Engineering's volatility "uncharacteristically high" and possibly fuelled by renewed talk of privatisation.
"SIA Engineering's stock price has performed poorly of late, and could thus provide a value-for-money privatisation target for SIA."
It has fallen 20 per cent over the past year to $2.51, before the surge, in the wake of "uninspiring" quarterly results and lower dividend expectations, said the analysts. They added that the rationale for an SIA privatisation would be "pretty strong" given the stock's low liquidity and the airline's already hefty 78 per cent stake. Cash-rich SIA would not need to tap capital markets.
But the analysts said remaining separately listed from SIA would give SIA Engineering an "aura of independence" - an important factor in the aircraft maintenance, repair and operations sector it is in - because it has to bid for work from other airlines, which accounts for some 40 per cent of its revenue.
If the privatisation materialises, DBS is estimating a premium of around 10 to 30 per cent above the last closing price, translating to an offer of $2.75 to $3.26 a share.
DBS has upgraded SIA Engineering to "buy" based on the privatisation premium, with a raised target price of $3.01. It noted that current valuations for the firm are at multi-year lows while the dividend yield is healthy at about 4.5 per cent. Risks are thus limited even if the privatisation does not materialise.
DBS said it would cost SIA $748 million to privatise SIA Engineering at $3.01 a share for the 22 per cent stake it does not already own.